The hedgehog (hh) segmentation gene of Drosophila melanogaster encodes a secreted signaling protein that functions in the patterning of larval and adult structures. Using low stringency hybridization and degenerate PCR primers, we have isolated complete or partial hh-like sequences from a range of invertebrate species including other insects, leech and sea urchin. We have also isolated three mouse and two human DNA fragments encoding distinct hh-like sequences. Our studies have focused upon Hhg-1, a mouse gene encoding a protein with 46% amino acid identity to hh. The Hhg-1 gene, which corresponds to the previously described vhh-1 or sonic class, is expressed in the notochord, ventral neural tube, lung bud, hindgut and posterior margin of the limb bud in developing mouse embryos. By segregation analysis the Hhg-1 gene has been localized to a region in proximal chromosome 5, where two mutations affecting mouse limb development previously have been mapped. In Drosophila embryos, ubiquitous expression of the Hhg-1 gene yields effects upon gene expression and cuticle pattern similar to those observed for the Drosophila hh gene. We also find that cultured quail cells transfected with a Hhg-1 expression construct can induce digit duplications when grafted to anterior or middistal but not posterior borders within the developing chick limb; more proximal limb element duplications are induced exclusively by mid-distal grafts. Both in transgenic Drosophila embryos and in transfected quail cells, the Hhg-1 protein product is cleaved to yield two stable fragments from a single larger precursor. The significance of Hhg-1 genetic linkage, patterning activity and proteolytic processing in Drosophila and chick embryos is discussed.