Sonic hedgehog (Shh) ligand secreted by the notochord induces distinct ventral cell identities in the adjacent neural tube by a concentration-dependent mechanism. To study this process, we genetically engineered mice that produce bioactive, fluorescently labeled Shh from the endogenous locus. We show that Shh ligand concentrates in close association with the apically positioned basal body of neural target cells, forming a dynamic, punctate gradient in the ventral neural tube. Both ligand lipidation and target field response influence the gradient profile, but not the ability of Shh to concentrate around the basal body. Further, subcellular analysis suggests that Shh from the notochord might traffic into the neural target field by means of an apical-to-basal-oriented microtubule scaffold. This study, in which we directly observe, measure, localize and modify notochord-derived Shh ligand in the context of neural patterning, provides several new insights into mechanisms of Shh morphogen action.