Midway between the anterior neural border and the midbrain-hindbrain boundary, two well-known local signalling centres in the early developing brain, is a further transverse boundary with putative signalling properties -- the zona limitans intrathalamica (ZLI). Here, we describe formation of the ZLI in zebrafish in relation to expression of sonic hedgehog (shh) and tiggy-winkle hedgehog (twhh), and to development of the forebrain regions that flank the ZLI: the prethalamus and thalamus. We find that enhanced Hh signalling increases the size of prethalamic and thalamic gene expression domains, whereas lack of Hh signalling leads to absence of these domains. In addition, we show that shh and twhh display both unique and redundant functions during diencephalic patterning. Genetic ablation of the basal plate shows that Hh expression in the ZLI alone is sufficient for diencephalic differentiation. Furthermore, acquisition of correct prethalamic and thalamic gene expression is dependent on direct Hh signalling. We conclude that proper maturation of the diencephalon requires ZLI-derived Hh signalling.