Secreted signalling molecules of the Hedgehog (Hh) family have many essential patterning roles during development of diverse organisms including Drosophila and humans. Although Hedgehog proteins most commonly affect cell fate, they can also stimulate cell proliferation. In humans several distinctive cancers, including basal-cell carcinoma, result from mutations that aberrantly activate Hh signal transduction. In Drosophila, Hh directly stimulates proliferation of ovarian somatic cells. Here we show that Hh acts specifically on stem cells in the Drosophila ovary. These cells cannot proliferate as stem cells in the absence of Hh signalling, whereas excessive Hh signalling produces supernumerary stem cells. We deduce that Hh is a stem-cell factor and suggest that human cancers due to excessive Hh signalling might result from aberrant expansion of stem cell pools.