Sonic hedgehog (Shh) is expressed and secreted from the embryonic lung epithelium and acts on the adjacent mesenchymal cells via its receptor Patched (Ptch)/Smoothened (Smo) and transcriptional effectors Gli proteins. Genetic studies showed that the Shh pathway plays critical roles in mouse lung development. However, little is known about microRNAs (miRNAs) downstream of Shh in embryonic lungs. Here we profiled miRNAs in embryonic lung cultures treated with cyclopamine, a specific Smo antagonist or with Smo agonist by next-generation of sequencing. We then performed functional screening to examine whether some of these miRNAs can modulate the induction of Gli-responsive luciferase by Shh treatment. These analyses revealed that expression of miR-326 and its host gene, Arrestin β1, is selectively enriched in embryonic lung mesenchymal cells and is specifically influenced by Shh activity. Furthermore, functional analyses showed that miR-326 acts as a negative modulator for Shh signaling by directly targeting Smo and Gli2. Together, these findings suggest a novel miR-326-negative feedback loop in regulating the activity of Shh signaling.