The hedgehog gene family encodes secreted proteins important in many developmental patterning events in both vertebrates and invertebrates. In the Drosophila eye disk, hedgehog controls the progression of photoreceptor differentiation in the morphogenetic furrow. To investigate whether hedgehog proteins are also involved in the development of the vertebrate retina at stages of photoreceptor differentiation, we analyzed expression of the three known vertebrate hedgehog genes. We found that Sonic hedgehog and Desert hedgehog are expressed in the developing retina, albeit at very low levels, whereas Indian hedgehog (Ihh) is expressed in the developing and mature retinal pigmented epithelium, beginning at embryonic day 13. To determine whether hedgehog proteins have activities on developing retinal cells, we used an in vitro system in which much of retinal histogenesis is recapitulated. N-terminal recombinant Sonic Hedgehog protein (SHH-N) was added to rat retinal cultures for 3-12 d, and the numbers of retinal cells of various phenotypes were analyzed by immunohistochemistry. We found that SHH-N caused a transient increase in the number of retinal progenitor cells, and a 2- to 10-fold increase in the number of photoreceptors differentiating in the cultures when analyzed with three different photoreceptor-specific antigens. In contrast, the numbers of retinal ganglion cells and amacrine cells were similar to those in control cultures. These results show that Hedgehog proteins can regulate mitogenesis and photoreceptor differentiation in the vertebrate retina, and Ihh is a candidate factor from the pigmented epithelium to promote retinal progenitor proliferation and photoreceptor differentiation.