During axial skeleton development, the notochord is essential for the induction of the sclerotome and for the subsequent differentiation of cartilage forming the vertebral bodies and intervertebral discs. These functions are mainly mediated by the diffusible signaling molecule Sonic hedgehog. The products of the paired-box-containingPax1and the mesenchyme forkhead-1 (Mfh1) genes are expressed in the developing sclerotome and are essential for the normal development of the vertebral column. Here, we demonstrate thatMfh1likePax1expression is dependent on Sonic hedgehog signals from the notochord, andMfh1andPax1act synergistically to generate the vertebral column. InMfh1/Pax1double mutants, dorsomedial structures of the vertebrae are missing, resulting in extreme spina bifida accompanied by subcutaneous myelomeningocoele, and the vertebral bodies and intervertebral discs are missing. The morphological defects inMfh1/Pax1double mutants strongly correlate with the reduction of the mitotic rate of sclerotome cells. Thus, both theMfh1and thePax1gene products cooperate to mediate Sonic hedgehog-dependent proliferation of sclerotome cells.