During development, basic helix–loop–helix (bHLH) proteins regulate formation of neurons from multipotent progenitor cells. However, bHLH factors linked to gliogenesis have not been described. We have isolated a pair of oligodendrocyte lineage genes (Olg-1 and Olg-2) that encode bHLH proteins and are tightly associated with development of oligodendrocytes in the vertebrate central nervous system (CNS). Ectopic expression of Olg-1 in rat cortical progenitor cell cultures promotes formation of oligodendrocyte precursors. In developing mouse embryos, Olg gene expression overlaps but precedes the earliest known markers of the oligodendrocyte lineage. Olg genes are expressed at the telencephalon–diencephalon border and adjacent to the floor plate, a source of the secreted signaling molecule Sonic hedgehog (Shh). Gain- and loss-of-function analyses in transgenic mice demonstrate that Shh is both necessary and sufficient for Olg gene expression in vivo.