The Palaeozoic form-taxon Lobopodia encompasses a diverse range of soft-bodied 'legged worms' known from exceptional fossil deposits1-. Although lobopodians occupy a deep phylogenetic position within Panarthropoda, a shortage of derived characters obscures their evolutionary relationships with extant phyla (Onychophora, Tardigrada and Euarthropoda)(2,3,5,10-15). Here we describe a complex feature in the terminal claws of the mid-Cambrian lobopodian Hallucigenia sparsa-their construction from a stack of constituent elements-and demonstrate that equivalent elements make up the jaws and claws of extant Onychophora. A cladistic analysis, informed by developmental data on panarthropod head segmentation, indicates that the stacked sclerite components in these two taxa are homologous-resolving hallucigeniid lobopodians as stem-group onychophorans. The results indicate a sister-group relationship between Tardigrada and Euarthropoda, adding palaeontological support to the neurological(16,17) and musculoskeletal(18,19) evidence uniting these disparate clades. These findings elucidate the evolutionary transformations that gave rise to the panarthropod phyla, and expound the lobopodian-like morphology of the ancestral panarthropod.