ABSTRACT The secreted molecule Sonic hedgehog (Shh) is crucial for floor plate and ventral brain development in amniote embryos. In zebrafish, mutations in cyclops (cyc), a gene that encodes a distinct signal related to the TGFβ family member Nodal, result in neural tube defects similar to those of shh null mice. cyc mutant embryos display cyclopia and lack floor plate and ventral brain regions, suggesting a role for Cyc in specification of these structures. cyc mutants express shh in the notochord but lack expression of shh in the ventral brain. Here we show that Cyc signalling can act directly on shh expression in neural tissue. Modulation of the Cyc signalling pathway by constitutive activation or inhibition of Smad2 leads to altered shh expression in zebrafish embryos. Ectopic activation of the shh promoter occurs in response to expression of Cyc signal transducers in the chick neural tube. Furthermore an enhancer of the shh gene, which controls ventral neural tube expression, is responsive to Cyc signal transducers. Our data imply that the Nodal related signal Cyc induces shh expression in the ventral neural tube. Based on the differential responsiveness of shh and other neural tube specific genes to Hedgehog and Cyc signalling, a two-step model for the establishment of the ventral midline of the CNS is proposed.