Sonic hedgehog (Shh) is a key signal in the specification of ventral cell identities along the length of the developing vertebrate neural tube. In the presumptive hindbrain and spinal cord, dorsal development is largely Shh independent. By contrast, we show that Shh is required for cyclin D1 expression and the subsequent growth of both ventral and dorsal regions of the diencephalon and midbrain in early somite-stage mouse embryos. We propose that a Shh-dependent signaling relay regulates proliferation and survival of dorsal cell populations in the diencephalon and midbrain. We present evidence that Fgf15 shows Shh-dependent expression in the diencephalon and may participate in this interaction, at least in part, by regulating the ability of dorsal neural precursors to respond to dorsally secreted Wnt mitogens.