The timing of cell cycle exit and temporal changes in the developmental competence of precursor cells are key components for the establishment of the normal complement of cell types in the mammalian retina. The identity of cell extrinsic cues that control these processes is largely unknown. We showed previously in mouse retina that sonic hedgehog (Shh) signalling from retinal ganglion cells (RGCs) to retinal precursor cells (RPC) is required for the establishment of normal retinal organization. Here, we show that conditional ablation of Shh expression in the peripheral mouse results in a depletion of the RPC pool, owing to precocious cell-cycle exit and neuronal differentiation. These changes were correlated with the downregulation of cyclin D1 and Hes1 gene expression. Shh inactivation also results in an increase in RGC number owing to a bias of RPC towards RGC production. In contrast to zebrafish, where Shh signalling drives cell cycle exit and RGC development, our findings indicate that in the mouse retina Shh signalling is required to maintain RPC proliferation and to control the timing of RGC development.