The aristaless-related homeobox genes Prx1 and Prx2 are required for correct skeletogenesis in many structures. Mice that lack both Prx1 and Prx2 functions display reduction or absence of skeletal elements in the skull, face, limbs and vertebral column. A striking phenotype is found in the lower jaw, which shows loss of midline structures, and the presence of a single, medially located incisor. We investigated development of the mandibular arch of Prx1^−/−Prx2^−/− mutants to obtain insight into the molecular basis of the lower jaw abnormalities. We observed in mutant embryos a local decrease in proliferation of mandibular arch mesenchyme in a medial area. Interestingly, in the oral epithelium adjacent to this mesenchyme, sonic hedgehog (Shh) expression was strongly reduced, indicative of a function for Prx genes in indirect regulation of Shh. Wild-type embryos that were exposed to the hedgehog-pathway inhibitor, jervine, partially phenocopied the lower jaw defects of Prx1^−/−Prx2^−/− mutants. In addition, this treatment led to loss of the mandibular incisors. We present a model that describes how loss of Shh expression in Prx1^−/−Prx2^−/− mutants leads to abnormal morphogenesis of the mandibular arch.