Mutations in mouse and human patched1 (ptc1) genes are associated with birth defects and cancer. Ptc1 is a receptor for Hedgehog (Hh) signaling proteins. Hh proteins activate transcription of target genes, including ptc1, and Ptc1 represses those genes, both by regulating the activity of Gli transcription factors. We have established mammalian cell lines with reduced Ptc1 function and a lacZ reporter to investigate Hh signal transduction. Embryonic fibroblasts were derived from mice, heterozygous or homozygous for a ptc1 mutation that inserts lacZ under the control of the ptc1 promoter (ptc1-lacZ). In heterozygous ptc1 cells, ptc1-lacZ was expressed at low levels but could be induced by Sonic Hedgehog (Shh) and Gli-1. Homozygous ptc1 cells expressed high levels of ptc1-lacZ without Hh stimulation. ptc1-lacZ expression was dependent on cell density in ptc1 homozygotes and Hh-stimulated heterozygotes but was independent of density when Gli1 was used to activate ptc1-lacZ. A wild-type ptc1 transgene introduced into homozygous ptc1 cells greatly reduced ptc1-lacZ expression. Expression of either half of Ptc1 alone resulted in improper maturation of the protein and a failure to complement the ptc1(-/-) cells. When co-expressed, both Ptc1 halves matured and had an activity similar to that of the intact protein. Three missense PTCH1 mutations exhibited significant functions in homozygous ptc1 cells. The missense mutants retained activity when expressed at about 10-fold lower levels and appeared as stable as wild-type Ptc1. These studies suggest that some tumors and disease phenotypes may arise from small reductions in PTCH1 activity.