The Hedgehog signalling pathway is essential for the development of diverse tissues during embryogenesis. Signalling is activated by binding of Hedgehog protein to the multipass membrane protein Patched (Ptc)^,. We have now identified a novel component in the vertebrate signalling pathway, which we name Hip (for Hedgehog-interacting protein) because of its ability to bind Hedgehog proteins. Hip encodes a membrane glycoprotein that binds to all three mammalian Hedgehog proteins with an affinity comparable to that of Ptc-1. Hip-expressing cells are located next to cells that express each Hedgehog gene. Hip expression is induced by ectopic Hedgehog signalling and is lost in Hedgehog mutants. Thus, Hip, like Ptc-1, is a general transcriptional target of Hedgehog signalling. Overexpression of Hip in cartilage, where Indian hedgehog (Ihh) controls growth, leads to a shortened skeleton that resembles that seen when Ihh function is lost (B. St-Jacques, M. Hammerschmidt & A.P.M., in preparation). Our findings support a model in which Hip attenuates Hedgehog signalling as a result of binding to Hedgehog proteins: a negative regulatory feedback loop established in this way could thus modulate the responses to any Hedgehog signal.