BACKGROUND: The hedgehog (hh) family of secreted signaling proteins is responsible for developmental patterning in a variety of systems, including the neural tube, limbs and somites. Within the neural tube, at the level of the spinal cord, products of the vertebrate gene sonic hedgehog (shh) are proposed to function as a ventral patterning influence, with the capability of inducing floor plate and motor neurons. RESULTS: We report the isolation of tiggy-winkle hedgehog (twhh), a novel member of the zebrafish hh gene family. Both twhh and shh are expressed in the ventral midline of the embryonic zebrafish neural tube and brain, but twhh expression becomes limited to the neural tube, whereas shh is also expressed in the notochord. Both genes are expressed in the developing brain, in domains that include a discrete region in the floor of the diencephalon, located between the sites of the future optic stalks. Using pax-2 and pax-6 as markers of proximo-distal fate within the developing eye, we found that ectopic expression of either hh gene promoted proximal fates and suppressed distal fates. In contrast, proximal fates were lost in cyclops mutant embryos, which lack twhh- and shh- expressing forebrain cells. Both twhh and shh proteins undergo autoproteolytic processing in vivo; a fragment corresponding to the amino-terminal cleavage product was sufficient to carry out all signaling activities associated with twhh in eye and brain development. CONCLUSIONS: These findings suggest that secreted signals encoded by members of the hedgehog gene family, emanating from the ventral midline of the neural tube, not only play important roles in dorso-ventral patterning of the brain but also appear to constitute an early patterning activity along the proximo-distal axis of the developing eyes.