Pituitary gland development serves as an excellent model system in which to study the emergence of distinct cell types from a common primordium in mammalian organogenesis. We have investigated the role of the morphogen Sonic hedgehog (SHH) in outgrowth and differentiation of the pituitary gland using loss-and gain-of-function studies in transgenic mice. Shh is expressed throughout the ventral diencephalon and the oral ectoderm, but its expression is subsequently absent from the nascent Rathke’s pouch as soon as it becomes morphologically visible, creating a Shh boundary within the oral epithelium. We used oral ectoderm/Rathke’s pouch-specific 5′ regulatory sequences (Pitx1^HS) from the bicoid related pituitary homeobox gene (Pitx1) to target overexpression of the Hedgehog inhibitor Hip (Huntingtin interacting protein) to block Hedgehog signaling, finding that SHH is required for proliferation of the pituitary gland. In addition, we provide evidence that Hedgehog signaling, acting at the Shh boundary within the oral ectoderm, may exert a role in differentiation of ventral cell types (gonadotropes and thyrotropes) by inducing Bmp2 expression in Rathke’s pouch, which subsequently regulates expression of ventral transcription factors, particularly Gata2. Furthermore, our data suggest that Hedgehog signaling, together with FGF8/10 signaling, synergizes to regulate expression of the LIM homeobox gene Lhx3, which has been proved to be essential for initial pituitary gland formation. Thus, SHH appears to exert effects on both proliferation and cell-type determination in pituitary gland development.