Activation of the Sonic hedgehog (Shh) signal transduction pathway is essential for normal pattern formation and cellular differentiation in the developing CNS. However, it is also thought to be etiological in primitive neuroectodermal tumors. We adapted GAL4/UAS methodology to ectopically express full-length Shh in the dorsal neural tube of transgenic mouse embryos commencing at 10 d postcoitum (dpc), beyond the period of primary dorsal-ventral pattern formation and floorplate induction. Expression of Shh was maintained until birth, permitting us to investigate effects of ongoing exposure to Shh on CNS precursors in vivo. Proliferative rates of spinal cord precursors were twice that of wild-type littermates at 12.5 dpc. In contrast, at late fetal stages (18.5 dpc), cells that were Shh-responsive but postmitotic were present in persistent structures reminiscent of the ventricular zone germinal matrix. This tissue remained blocked in an undifferentiated state. These results indicate that cellular competence restricts the proliferative response to Shh in vivo and provide evidence that proliferation and differentiation can be regulated separately in precursor cells of the spinal cord. Thus, Hedgehog signaling may contribute to CNS tumorigenesis by directly enhancing proliferation and preventing neural differentiation in selected precursor cells.