The secreted protein sonic hedgehog (Shh) is essential for normal development of many organs. Targeted disruption of Shh in mouse leads to near complete absence of craniofacial skeletal elements at birth, and mutation of SHH in human causes holoprosencephaly (HPE), frequently associated with defects of derivatives of pharyngeal arches. To investigate the role of Shh signaling in early pharyngeal arch development, we analyzed Shh mutant embryos using molecular markers and found that the first pharyngeal arch (PA1) was specifically hypoplastic and fused in the midline, and remaining arches were well formed at embryonic day (E) 9.5. Molecular analyses using specific markers suggested that the growth of the maxillary arch and proximal mandibular arch was severely defective in Shh-null PA1, whereas the distal mandibular arch was less affected. TUNEL assay revealed an increase in the number of apoptotic signals in PA1 of Shh mutant embryos. Ectodermal expression of fibroblast growth factor (Fgf)-8, a cell survival factor for pharyngeal arch mesenchyme, was down-regulated in the PA1 of Shh mutants. Consistent with this observation, downstream transcriptional targets of Fgf8 signaling in neural crest-derived mesenchyme, including Barx1, goosecoid, and Dlx2, were also down-regulated in Shh-null PA1. These results demonstrate that epithelial-mesenchymal signaling and transcriptional events coordinated by Shh, partly via Fgf8, is essential for cell survival and tissue outgrowth of the developing PA1.