Muscle progenitor cells migrate from the lateral somites into the developing vertebrate limb, where they undergo patterning and differentiation in response to local signals. Sonic hedgehog (Shh) is a secreted molecule made in the posterior limb bud that affects patterning and development of multiple tissues, including skeletal muscles. However, the cell-autonomous and non-cell-autonomous functions of Shh during limb muscle formation have remained unclear. We found that Shh affects the pattern of limb musculature non-cell-autonomously, acting through adjacent nonmuscle mesenchyme. However, Shh plays a cell-autonomous role in maintaining cell survival in the dermomyotome and initiating early activation of the myogenic program in the ventral limb. At later stages, Shh promotes slow muscle differentiation cell-autonomously. In addition, Shh signaling is required cell-autonomously to regulate directional muscle cell migration in the distal limb. We identify neuroepithelial cell transforming gene 1 (Net1) as a downstream target and effector of Shh signaling in that context.