The signalling peptide encoded by the sonic hedgehog gene is restricted to localised thickenings of oral epithelium, which mark the first morphological evidence of tooth development, and is known to play a crucial role during the initiation of odontogenesis. We show that at these stages in the murine mandibular arch in the absence of epithelium, the Shh targets Ptc1and Gli1 are upregulated in diastema mesenchyme, an edentulous region between the sites of molar and incisor tooth formation. This ectopic expression is not associated with Shh transcription but with Shh protein, undetectable in the presence of epithelium. These findings suggest that, in diastema mesenchyme, restriction of Shh activity is dependent upon the overlying epithelium. This inhibitory activity was demonstrated by the ability of transplanted diastema epithelium to downregulate Ptc1 in tooth explants, and for isolated diastema mesenchyme to express Ptc1. A candidate inhibitor in diastema mesenchyme is the glycosylphosphatidylinositol-linked membrane glycoprotein Gas1. Gas1is normally expressed throughout mandibular arch mesenchyme; however, in the absence of epithelium this expression was downregulated specifically in the diastema where ectopic Shh protein was identified. Although Shh signalling has no effect upon Gas1 expression in mandibular arch mesenchyme,overexpression of Gas1 results in downregulation of ectopic Ptc1. Therefore, control of the position of tooth initiation in the mandibular arch involves a combination of Shh signalling at sites where teeth are required and antagonism in regions destined to remain edentulous.