The secreted protein Sonic hedgehog (Shh) exerts many of its patterning effects through a combination of short- and long-range signalling. Three distinct mechanisms, which are not necessarily mutually exclusive, have been proposed to account for the long-range effects of Shh: simple diffusion of Shh, a relay mechanism in which Shh activates secondary signals, and direct delivery of Shh through cytoplasmic extensions, termed cytonemes. Although there is much data (using soluble recombinant Shh (ShhN)) to support the simple diffusion model of long-range Shh signalling, there has been little evidence to date for a native form of Shh that is freely diffusible and not membrane-associated. Here we provide evidence for a freely diffusible form of Shh (s-ShhNp) that is cholesterol modified, multimeric and biologically potent. We further demonstrate that the availability of s-ShhNp is regulated by two functional antagonists of the Shh pathway, Patched (Ptc) and Hedgehog-interacting protein (Hip). Finally, we show a gradient of s-ShhNp across the anterior-posterior axis of the chick limb, demonstrating the physiological relevance of s-ShhNp.