Both estradiol (E2) and Sonic Hedgehog (Shh) contribute to angiogenesis and nerve regeneration. Here, we investigated whether E2 improves the recovery of injured nerves by downregulating the Shh inhibitor hedgehog-interacting protein (HIP) and increasing Shh-induced angiogenesis. Mice were treated with local injections of E2 or placebo one week before nerve-crush injury; 28 days after injury, nerve conduction velocity, exercise duration, and vascularity were significantly greater in E2-treated mice than in placebo-treated mice. E2 treatment was also associated with higher mRNA levels of Shh, the Shh receptor Patched-1, and the Shh transcriptional target Gli1, but with lower levels of HIP. The E2-induced enhancement of nerve vascularity was abolished by the Shh inhibitor cyclopamine, and the effect of E2 treatment on Shh, Gli1, and HIP mRNA expression was abolished by the E2 inhibitor ICI. Gli-luciferase activity in human umbilical-vein endothelial cells (HUVECs) increased more after treatment with E2 and Shh than after treatment with E2 alone, and E2 treatment reduced HIP expression in HUVECs and Schwann cells without altering Shh expression. Collectively, these findings suggest that E2 improves nerve recovery, at least in part, by reducing HIP expression, which subsequently leads to an increase in Shh signaling and Shh-induced angiogenesis.