The PATCHED (PTC) gene encodes a Sonic hedgehog (Shh) receptor and a tumor suppressor protein that is defective in basal cell nevus syndrome (BCNS). Functions ofPTC were investigated by inactivating the mouse gene. Mice homozygous for the ptc mutation died during embryogenesis and were found to have open and overgrown neural tubes. Two Shh target genes, ptc itself and Gli, were derepressed in the ectoderm and mesoderm but not in the endoderm. Shh targets that are, under normal conditions, transcribed ventrally were aberrantly expressed in dorsal and lateral neural tube cells. Thus Ptc appears to be essential for repression of genes that are locally activated by Shh. Mice heterozygous for the ptc mutation were larger than normal, and a subset of them developed hindlimb defects or cerebellar medulloblastomas, abnormalities also seen in BCNS patients.