Hedgehog (Hh) signaling is critical for patterning and growth during mammalian embryogenesis. Transcriptional profiling identified Growth-arrest-specific 1 (Gas1) as a general negative target of Shh signaling. Data presented here define Gas1 as a novel positive component of the Shh signaling cascade. Removal of Gas1 results in a Shh dose-dependent loss of cell identities in the ventral neural tube and facial and skeletal defects, also consistent with reduced Shh signaling. In contrast, ectopic Gas1 expression results in Shh-dependent cell-autonomous promotion of ventral cell identities. These properties mirror those of Cdo, an unrelated, cell surface Shh-binding protein. We show that Gas1 and Cdo cooperate to promote Shh signaling during neural tube patterning, craniofacial, and vertebral development. Overall, these data support a new paradigm in Shh signaling whereby positively acting ligand-binding components, which are initially expressed in responding tissues to promote signaling, are then down-regulated by active Hh signaling, thereby modulating responses to ligand input.