Müller glia have been demonstrated to display stem-cell properties after retinal damage. Here, we report this potential can be regulated by Sonic hedgehog (Shh) signaling. Shh can stimulate proliferation of Müller glia through its receptor and target gene expressed on them, furthermore, Shh-treated Müller glia are induced to dedifferentiate by expressing progenitor-specific markers, and then adopt cell fate of rod photoreceptor. Inhibition of signaling by cyclopamine inhibits proliferation and dedifferentiation. Intraocular injection of Shh promotes Müller glia activation in the photoreceptor-damaged retina, Shh also enhances neurogenic potential by producing more rhodopsin-positive photoreceptors from Müller glia-derived cells. Together, these results provide evidences that Müller glia act as potential stem cells in mammalian retina, Shh may have therapeutic effects on these cells for promoting the regeneration of retinal neurons.