Cell-extrinsic signals can profoundly influence the production of various neurons from common progenitors. Yet mechanisms by which extrinsic signals coordinate progenitor cell proliferation, cell cycle exit, and cell fate choices are not well understood. Here, we address whether Hedgehog (Hh) signals independently regulate progenitor proliferation and neuronal fate decisions in the embryonic mouse retina. Conditional ablation of the essential Hh signaling componentSmoothened(Smo) in proliferating progenitors, rather than in nascent postmitotic neurons, leads to a dramatic increase of retinal ganglion cells (RGCs) and a mild increase of cone photoreceptor precursors without significantly affecting other early-born neuronal cell types. In addition,Smo-deficient progenitors exhibit aberrant expression of cell cycle regulators and delayed G1/S transition, especially during the late embryonic stages, resulting in a reduced progenitor pool by birth. Deficiency inSmofunction also causes reduced expression of the basic helix-loop-helix transcription repressorHes1and preferential elevation of the proneural geneMath5. InSmoandMath5double knock-out mutants, the enhanced RGC production observed inSmo-deficient retinas is abolished, whereas defects in the G1/S transition persist, suggesting thatMath5mediates the Hh effect on neuronal fate specification but not on cell proliferation. These findings demonstrate that Hh signals regulate progenitor pool expansion primarily by promoting cell cycle progression and influence cell cycle exit and neuronal fates by controlling specific proneural genes. Together, these distinct cellular effects of Hh signaling in neural progenitor cells coordinate a balanced production of diverse neuronal cell types.