Differentiation of somites into sclerotome, dermatome, and myotome is controlled by a complex set of inductive interactions. The ability of axial midline tissues, the notochord and floor plate, to induce sclerotome has been well documented and has led to models in which ventral somite identity is specified by signals derived from the notochord and floor plate. Herein, we provide evidence that Sonic hedgehog, a vertebrate homolog of the Drosophila segment polarity gene hedgehog, is a signal produced by the notochord and floor plate that directs ventral somite differentiation. Sonic hedgehog is expressed in ventral midline tissues at critical times during somite specification and has the ability, when ectopically expressed, to enhance the formation of sclerotome and antagonize the development of dermatome.