Sonic hedgehog (Shh) is a secreted signaling molecule for tissue patterning and stem cell specification in vertebrate embryos. Shh mediates both long-range and short-range signaling responses in embryonic tissues through the activation and repression of target genes by its Gli transcription factor effectors. Despite the well-established functions of Shh signaling in development and human disease, developmental target genes of Gli regulation are virtually unknown. In this study, we investigate the role of Shh signaling in the control of Myf5, a skeletal muscle regulatory gene for specification of muscle stem cells in vertebrate embryos. In previous genetic studies, we showed that Shh is required for Myf5 expression in the specification of dorsal somite, epaxial muscle progenitors. However, these studies did not distinguish whether Myf5 is a direct target of Gli regulation through long-range Shh signaling, or alternatively, whether Myf5 regulation is a secondary response to Shh signaling. To address this question, we have used transgenic analysis with lacZ reporter genes to characterize an Myf5 transcription enhancer that controls the activation of Myf5 expression in the somite epaxial muscle progenitors in mouse embryos. This Myf5 epaxial somite (ES) enhancer is Shh-dependent, as shown by its complete inactivity in somites of homozygous Shh mutant embryos, and by its reduced activity in heterozygous Shh mutant embryos. Furthermore, Shh and downstream Shh signal transducers specifically induce ES enhancer/luciferase reporters in Shh-responsive 3T3 cells. A Gli-binding site located within the ES enhancer is required for enhancer activation by Shh signaling in transfected 3T3 cells and in epaxial somite progenitors in transgenic embryos. These findings establish that Myf5 is a direct target of long-range Shh signaling through positive regulation by Gli transcription factors, providing evidence that Shh signaling has a direct inductive function in cell lineage specification.