Sonic hedgehog (Shh), produced in the notochord and floor plate, is necessary for both neural and mesodermal development. To reach the myotome, Shh has to traverse the sclerotome and a reduction of sclerotomal Shh affects myotome differentiation. By investigating loss and gain of Shh function, and floor-plate deletions, we report that sclerotomal Shh is also necessary for neural tube development. Reducing the amount of Shh in the sclerotome using a membrane-tethered hedgehog-interacting protein or Patched1, but not dominant active Patched, decreased the number of Olig2+ motoneuron progenitors and Hb9+ motoneurons without a significant effect on cell survival or proliferation. These effects were a specific and direct consequence of Shh reduction in the mesoderm. In addition, grafting notochords in a basal but not apical location, vis-à-vis the tube, profoundly affected motoneuron development, suggesting that initial ligand presentation occurs at the basal side of epithelia corresponding to the sclerotome-neural tube interface. Collectively, our results reveal that the sclerotome is a potential site of a Shh gradient that coordinates the development of mesodermal and neural progenitors.