Introductory paragraph The Hedgehog (HH) pathway is critical for development and adult tissue homeostasis 1 . Aberrant HH signaling can cause congenital malformations, such as digit anomalies and holoprosencephaly 2 , and other diseases, including cancer 3 . Signal transduction is initiated by HH ligand binding to the Patched 1 (PTCH1) receptor on primary cilia, thereby releasing inhibition of Smoothened (SMO), a HH pathway activator 4 . Although cholesterol and several oxysterol lipids, which are enriched in the ciliary membrane, play a crucial role in HH activation 4,5 , the molecular mechanisms governing the regulation of these lipid molecules remain unresolved. Here, we identify Canopy 4 (CNPY4), a Saposin-like protein, as a regulator of the HH pathway that controls membrane sterol lipid levels. Cnpy4 −/− embryos exhibit multiple defects consistent with HH signaling perturbations, most notably changes in digit number. Knockdown of Cnpy4 hyperactivates the HH pathway at the level of SMO in vitro , and elevates membrane levels of accessible sterol lipids such as cholesterol, an endogenous ligand involved in SMO activation 6 . Thus, our data demonstrate that CNPY4 is a negative regulator that fine-tunes the initial steps of HH signal transduction, revealing a previously undescribed facet of HH pathway regulation that operates through control of membrane composition.