Leaf shape elaboration and organ separation are critical for plant morphogenesis. We characterized the developmental roles of lobed leaflet1 by analyzing a recessive mutant in the model legume Medicago truncatula. An ortholog of Arabidopsis thaliana argonaute7 (AGO7), Mt-AGO7/lobed leaflet1, is required for the biogenesis of a trans-acting short interfering RNA (ta-siRNA) to negatively regulate the expression of auxin response factors in M. truncatula. Loss of function in AGO7 results in pleiotropic phenotypes in different organs. The prominent phenotype of the ago7 mutant is lobed leaf margins and more widely spaced lateral organs, suggesting that the trans-acting siRNA3 (TAS3) pathway negatively regulates the formation of boundaries and the separation of lateral organs in M. truncatula. Genetic interaction analysis with the smooth leaf margin1 (slm1) mutant revealed that leaf margin formation is cooperatively regulated by the auxin/SLM1 (ortholog of Arabidopsis PIN-formed1) module, which influences the initiation of leaf margin teeth, and the TAS3 ta-siRNA pathway, which determines the degree of margin indentation. Further investigations showed that the TAS3 ta-siRNA pathway and no apical meristem (ortholog of Arabidopsis cup-shaped cotyledon) antagonistically regulate both leaf margin development and lateral organ separation, and the regulation is partially dependent on the auxin/SLM1 module.