We used both clonal osteoblast-like cells and primary calvarial osteoblastic cells to examine the role of Hedgehog in osteoblast biology. Primary osteoblasts and several clonal osteoblast-like cell lines express Indian hedgehog (Ihh), and genes encoding both components of its receptor, patched (Ptc) and smoothened (Smo). Moreover, Ihh is relatively increased in phenotypically mature clonal cells and it increases by fivefold in primary osteoblasts as they mature in culture. Recombinant N-terminal Sonic Hedgehog (rSHH-N) upregulates Ptc and Gli-1 in osteoblasts, classical transcriptional targets. Furthermore; in response to rSHH-N, immunoreactive parathyroid hormone-related peptide (iPTHrP) secretion is transiently increased in medium conditioned by primary osteoblasts. Changes in PTHrP expression mirror those of iPTHrP, except in late cultures, when mRNA levels remain relatively elevated in response to rSHH-N. Gli-1, but not Ptc, becomes resistant to treatment with rSHH-N over a time course paralleling that of PTHrP, suggesting that mechanisms regulated by Gli-1 affect PTHrP. Last, rSHH-N increases formation of mineralized bone nodules and it accelerates expression of alkaline phosphatase, alkaline phosphatase activity, and mineralization. Taken together, these data suggest a functional role for Hedgehog protein in osteoblast recruitment and differentiation, which includes stimulation of PTHrP expression and secretion.