Although the regulation of branching morphogenesis by spatially distributed cues is well established, the role of intracellular signaling in determining the branching pattern remains poorly understood. In this study, we investigated the regulation and function of phospholipase C gamma (PLCγ) in Fibroblast Growth Factor (FGF) signaling in lacrimal gland development. We showed that deletion of PLCγ1 in the lacrimal gland epithelium leads to ectopic branching and acinar hyperplasia, which was phenocopied by either mutating the PLCγ1 binding site on Fgfr2 or disabling any of its SH2 domains. PLCγ1 inactivation did not change the level of Fgfr2 or affect MAPK signaling, but instead led to sustained AKT phosphorylation due to increased PIP3 production. Consistent with this, PLCγ1 mutant phenotype can be reproduced by elevation of PI3K signaling in Pten knockout and attenuated by blocking AKT signaling. This study demonstrated that PLCγ modulates PI3K signaling by shifting phosphoinositide metabolism, revealing an important role of signaling dynamics in conjunction with spatial cues in shaping branching morphogenesis.