Sonic hedgehog (Shh) produced in the zone of polarizing activity is the major determinant of anteroposterior development of the amniote limb. The mature and active Shh protein is cholesterol-modified at its C terminus, and the hydrophobic nature of the modification requires the function of Dispatched (mDispA), a seven-pass transmembrane protein, for Shh release from its source. The current model suggests that the cholesterol moiety promotes the spread of Shh gradient in the limb bud. However, this model is inconsistent with findings in Drosophila and not in line with current thoughts on the role of the cholesterol moiety in Shh multimerization. Therefore, it remains unclear how the cholesterol moiety affects the postrelease extracellular behavior of Shh that relates to the shape of its activity gradient in responsive tissues. Here, we report functional analyses in mice showing that Shh lacking cholesterol modification (ShhN) has an increased propensity to spread long-distance, eliciting ectopic Shh pathway activation consistent with target gene expressions and modulating the level of Gli3 processing in the anterior limb mesoderm. These molecular alterations are reflected in the mispatterning of digits in ShhN mutants. Additionally, we provide direct evidence for the long-distance movement of ShhN across the anteroposterior axis of the limb bud. Our findings suggest that the cholesterol moiety regulates the range and shape of the Shh morphogen gradient by restricting rather than promoting the postrelease spread of Shh across the limb bud during early development.