Sonic hedgehog (Shh) expression is highly localized to the epithelium at the future sites of tooth development. This restricted expression suggests that inhibition of Shh in areas where teeth do not form may be an important mechanism in tooth germ localization. Recently, Hip, a putative vertebrate antagonist of Shh, has been identified. We have investigated the expression of Hip during early tooth development and found it not to be localized in cells immediately adjacent to Shh-expressing cells, but rather at a distance, separated by cells expressing Ptc1. Hip is also regulated by Shh in the first branchial arch. Shh-soaked agarose beads are able to induce the expression of Hip in odontogenic mesenchyme. A role for Hip might be to prevent the spread of excess Shh ligand beyond an immediate Ptc1-induced zone in odontogenic mesenchyme. This mechanism would therefore restrict Shh signaling specifically to those regions along the oral axis that are destined to form teeth.