We characterize a sonic hedgehog (Shh) signaling domain restricted to the adventitial layer of artery wall that supports resident Sca1-positive vascular progenitor cells (AdvSca1). Using patched-1 (Ptc1^lacZ) and patched-2 (Ptc2^lacZ) reporter mice, adventitial Shh signaling activity was first detected at embryonic day (E) 15.5, reached the highest levels between postnatal day 1 (P1) and P10, was diminished in adult vessels, and colocalized with a circumferential ring of Shh protein deposited between the media and adventitia. In Shh^−/− mice, AdvSca1 cells normally found at the aortic root were either absent or greatly diminished in number. Using a Wnt1-cre lineage marker that identifies cells of neural crest origin, we found that neither the adventitia nor AdvSca1 cells were labeled in arteries composed of neural crest-derived smooth muscle cells (SMCs). Although AdvSca1 cells do not express SMC marker proteins in vivo, they do express transcription factors thought to be required for SMC differentiation, including serum response factor (SRF) and myocardin family members, and readily differentiate to SMC-like cells in vitro. However, AdvSca1 cells also express potent repressors of SRF-dependent transcription, including Klf4, Msx1, and FoxO4, which may be critical for maintenance of the SMC progenitor phenotype of AdvSca1 cells in vivo. We conclude that a restricted domain of Shh signaling is localized to the arterial adventitia and may play important roles in maintenance of resident vascular SMC progenitor cells in the artery wall.