Secreted proteins of the Hedgehog (Hh) family have diverse organizing roles in animal development. Recently, a serpentine protein Smoothened (Smo) has been proposed as a Hh receptor. Here, we present evidence that implicates another multiple-pass transmembrane protein, Patched (Ptc), in Hh reception and suggests a novel signal transduction mechanism in which Hh binds to Ptc, or a Ptc–Smo complex, and thereby induces Smo activity. Our results also show that Ptc limits the range of Hh action; we provide evidence that high levels of Ptc induced by Hh serve to sequester any free Hh and therefore create a barrier to its further movement.