Oligodendrocyte precursor development in the embryonic spinal cord is thought to be regulated by the secreted signal, Sonic hedgehog (Shh). Such precursors can be identified by the expression of Olig genes, encoding basic helix-loop-helix factors, in the spinal cord and brain. However, the signaling pathways that govern oligodendrocyte precursor (OLP) development in the rostral central nervous system are poorly understood. Here, we show that Shh is required for oligodendrocyte development in the mouse forebrain and spinal cord, and that Shh proteins are both necessary and sufficient for OLP production in cortical neuroepithelial cultures. Moreover, adenovirus-mediated Olig1 ectopic expression can promote OLP formation independent of Shh activity. Our results demonstrate essential functions for Shh during early phases of oligodendrocyte development in the mammalian central nervous system. They further suggest that a key role of Shh signaling is activation of Olig genes.