The role of the hedgehog (HH) signaling pathway in ovarian function was examined in transgenic mice in which expression of a dominant active allele of the signal transducer smoothened (SmoM2) was directed to the ovary and Müllerian duct by cre-mediated recombination (Amhr2^cre/+SmoM2). Mutant mice were infertile and had ovarian and reproductive tract defects. Ovaries contained follicles of all sizes and corpora lutea (CL), but oocytes were rarely recovered from the oviducts of superovulated mice and remained trapped in preovulatory follicles. Measures of luteinization did not differ. Cumulus expansion appeared disorganized, and in vitro analyses confirmed a reduced expansion index. Microarray analysis indicated that expression levels of genes typical of smooth muscle were reduced in mutant mice, and RT-PCR showed that levels of expression of muscle genes were reduced in the nongranulosa, theca-interstitial cell-enriched fraction. Whereas a layer of cells in the outer theca was positively stained for smooth muscle actin in control ovaries, this staining was reduced or absent in mutant ovaries. Expression of a number of genes in granulosa cells that are known to be important for ovulation did not differ in mutants and controls. Expression of components of the HH pathway was observed in both granulosa cells and in the nongranulosa, residual ovarian tissue and changed in response to treatment with equine chorionic gonadotropin/human gonadotropin. The results show that appropriate signaling through the HH pathway is required for development of muscle cells within the theca and that impaired muscle development is associated with failure to release the oocyte at ovulation.