In humans, holoprosencephaly (HPE) is a common birth defect characterized by the absence of midline cells from brain, facial, and oral structures. To understand the pathoetiology of HPE, we investigated the involvement of mammalian prechordal plate (PrCP) cells in HPE pathogenesis and the requirement of the secreted protein sonic hedgehog (Shh) in PrCP development. We show using rat PrCP lesion experiments and DiI labeling that PrCP cells are essential for midline development of the forebrain, foregut endoderm, and ventral cranial mesoderm in mammals. We demonstrate that PrCP cells do not develop into ventral cranial mesoderm in Shh(-/-) embryos. Using Shh(-/-) and chimeric embryos we show that Shh signal is required for the maintenance of PrCP cells in a non-cell autonomous manner. In addition, the hedgehog (HH)-responding cells that normally appear during PrCP development to contribute to midline tissues, do not develop in the absence of Shh signaling. This suggests that Shh protein secreted from PrCP cells induces the differentiation of HH-responding cells into midline cells. In the present study, we show that the maintenance of a viable population of PrCP cells by Shh signal is an essential process in development of the midline of the brain and craniofacial structures. These findings provide new insight into the mechanism underlying HPE pathoetiology during dynamic brain and craniofacial morphogenesis.