Sonic hedgehog (Shh) is strongly implicated in the development of ventral structures in the nervous system. Addition of Sonic hedgehog protein to chick spinal cord explants induces floor plate and motoneuron development. Whether Shh acts directly to induce these cell types or whether their induction is mediated by additional factors is unknown. To further investigate the role of Shh in spinal neuron development, we have used low-density cultures of murine spinal cord precursor cells. Shh stimulated neuronal differentiation; however, it did not increase the proportion of neurons expressing the first postmitotic motoneuron marker Islet-1. Moreover, Shh did induce Islet-1 expression in neural tube explants, suggesting that it acts in combination with neural tube factors to induce motoneurons. Another factor implicated in motoneuron development is neurotrophin 3 (NT3), and when assayed in isolated precursor cultures, it had no effect on Islet-1 expression. However, the combination of N-terminal Shh and NT3 induced Islet-1 expression in the majority of neurons in low-density cultures of caudal intermediate neural plate. Furthermore, in explant cultures, Shh-mediated Islet-1 expression was blocked by an anti-NT3 antibody. Previous studies have shown expression of NT3 in the region of motoneuron differentiation and that spinal fusimotor neurons are lost in NT3 knock-out animals. Taken together, these findings suggest that Shh can act directly on spinal cord precursors to promote neuronal differentiation, but induction of Islet-1 expression is regulated by factors additional to Shh, including NT3.