We report the identification of a novel protein that participates in Hedgehog-mediated patterning of the neural tube. This protein, named Tectonic, is the founding member of a previously undescribed family of evolutionarily conserved secreted and transmembrane proteins. During neural tube development, mouse Tectonic is required for formation of the most ventral cell types and for full Hedgehog (Hh) pathway activation. Epistasis analyses reveal that Tectonic modulates Hh signal transduction downstream of Smoothened (Smo) and Rab23. Interestingly, characterization of Tectonic Shh and Tectonic Smo double mutants indicates that Tectonic plays an additional role in repressing Hh pathway activity.