The differentiation of distinct cell types in the ventral neural tube depends on local inductive signals from the notochord. We have isolated a vertebrate homolog of the Drosophila segment polarity gene hedgehog (hh) from zebrafish and rat, termed vhh-1. vhh-1 is expressed in the node, notochord, floor plate, and posterior limb bud mesenchyme. Each of these cell groups has floor plate inducing activity, suggesting that the vhh-1 gene may encode a floor plate-inducing molecule. Widespread expression of rat vhh-1 in frog embryos leads to ectopic floor plate differentiation in the neural tube. In vitro tests for the signaling functions of vhh-1 demonstrate that COS cells expressing the rat vhh-1 gene induce floor plate and motor neuron differentiation in neural plate explants. vhh-1 may, therefore, contribute to the floor plate and motor neuron inducing activities of the notochord.