We investigated the role of Sonic hedgehog (SHH) in osteoblast differentiation and bone formation. The numbers of ALP-positive cells in the mouse fibroblastic cell line C3H10T1/2 and the mouse osteoblastic cell line MC3T3-E1 were increased by co-culture with chicken fibroblasts transfected with chicken Shh cDNA encoding amino-terminal peptide (Shh-N). The conditioned medium of Shh-N-RCAS-transfected chicken fibroblast cultures also significantly increased ALP activity in both C3H10T1/2 and MC3T3-E1 cells. Intramuscular transplantation of Shh-N-RCAS-transfected chicken fibroblasts into athymic mice induced ectopic bone formation. These results indicate that SHH induces osteoblast differentiation and ectopic bone formation.