Members of the Hedgehog (Hh) family encode secreted molecules that act as potent organizers during vertebrate and invertebrate development. Post-translational modification regulates both the range and efficacy of Hh protein. One such modification is the acylation of the N-terminal cysteine of Hh. In a screen for zygotic lethal mutations associated with maternal effects, we have identified rasp, a novel Drosophila segment polarity gene. Analysis of the rasp mutant phenotype, in both the embryo and wing imaginal disc demonstrates that rasp does not disrupt Wnt/Wingless signaling but is specifically required for Hh signaling. The requirement of rasp is restricted only to those cells that produce Hh; hh transcription, protein levels and distribution are not affected by the loss of rasp. Molecular analysis reveals that rasp encodes a multipass transmembrane protein that has homology to a family of membrane bound O-acyl transferases. Our results suggest that Rasp-dependent acylation is necessary to generate a fully active Hh protein.