Sonic hedgehog (Shh) is expressed in the ectoderm of the forming hair follicle and feather bud during normal development. However, inappropriate activation of the Shh signal transduction cascade in human epidermis can cause basal cell carcinoma. Here we show that during normal development of avian skin, Shh is first expressed only after the responsiveness to this protein has been suppressed in most of the surrounding ectodermal cells. Forced expression of Shh in avian skin prior to this time causes a disorganized ectodermal proliferation. However, as skin begins to differentiate, the forced expression of Shh causes feather bud formation. Subsequently, expression of Shh in interfollicular epidermis has little or no morphological effect. Restricted responsiveness to Shh in developing skin has functional consequences for morphogenesis and may have important implications for cutaneous pathologies as well.