The vertebrate hedgehog-related gene, sonic hedgehog, is expressed in ventral domains along the entire rostrocaudal length of the neural tube, including the forebrain. Shh induces the differentiation of ventral neuronal cell types in explants derived from prospective forebrain regions of the neural plate. Neurons induced in explants derived from diencephalic and telencephalic levels of the neural plate express the LIM homeodomain protein Islet-1, but these neurons possess distinct identities that match those of the ventral neurons normally generated in these two subdivisions of the forebrain. These results, together with other studies of neuronal differentiation at caudal levels of the neural tube, suggest that a single inducing molecule, Shh, mediates the induction of distinct ventral neuronal cell types along the entire rostrocaudal extent of the embryonic central nervous system.