The Hedgehog family of secreted morphogens specifies the fate of a large number of different cell types within invertebrate and vertebrate embryos, including the muscle cell precursors of the embryonic myotome of zebrafish. Formation of Hedgehog-sensitive muscle fates is disrupted within homozygous zebrafish mutants of the "you"-type class, the majority of which disrupt components of the Hedgehog (HH) signal transduction pathway. We have undertaken a phenotypic and molecular characterisation of one of these mutants, you, which we show results from mutations within the zebrafish orthologue of the mammalian gene scube2. This gene encodes a member of the Scube family of proteins, which is characterised by several protein motifs including EGF and CUB domains. Epistatic and molecular analyses position Scube2 function upstream of Smoothened (Smoh), the signalling component of the HH receptor complex, suggesting that Scube2 may act during HH signal transduction prior to, or during, receipt of the HH signal at the plasma membrane. In support of this model we show that scube2 has homology to cubilin, which encodes an endocytic receptor involved in protein trafficking suggesting a possible mode of function for Scube2 during HH signal transduction.