Chemotherapeutic agents induce complex tissue responses in vivo and damage normal organ functions. Here we use the feather follicle to investigate details of this damage response. We show that cyclophosphamide treatment, which causes chemotherapy-induced alopecia in mice and man, induces distinct defects in feather formation: feather branching is transiently and reversibly disrupted, thus leaving a morphological record of the impact of chemotherapeutic agents, whereas the rachis (feather axis) remains unperturbed. Similar defects are observed in feathers treated with 5-fluorouracil or taxol but not with doxorubicin or arabinofuranosyl cytidine (Ara-C). Selective blockade of cell proliferation was seen in the feather branching area, along with a downregulation of sonic hedgehog (Shh) transcription, but not in the equally proliferative rachis. Local delivery of the Shh inhibitor, cyclopamine, or Shh silencing both recapitulated this effect. In mouse hair follicles, those chemotherapeutic agents that disrupted feather formation also downregulated Shh gene expression and induced hair loss, whereas doxorubicin or Ara-C did not. Our results reveal a mechanism through which chemotherapeutic agents damage rapidly proliferating epithelial tissue, namely via the cell population-specific, Shh-dependent inhibition of proliferation. This mechanism may be targeted by future strategies to manage chemotherapy-induced tissue damage.