Hedgehog (Hh) signaling plays a major role in multiple aspects of embryonic development, which involves both short- and long-range signaling from localized Hh sources. One unusual aspect of Hh signaling is the autoproteolytic processing of Hh followed by lipid modification. As a consequence, the N-terminal fragment of Hh becomes membrane anchored on the cell surface of Hh-producing cells. A key issue in Hh signaling is to understand the molecular mechanisms by which lipid-modified Hh protein is transported from its sites of synthesis and subsequently moves through the morphogenetic field. The dispatched gene, which encodes a putative multipass membrane protein, was initially identified in Drosophila and is required in Hh-producing cells, where it facilitates the transport of cholesterol-modified Hh. We report the identification of the mouse dispatched (Disp) gene and a phenotypic analysis of Disp mutant mice. Disp-null mice phenocopy mice deficient in the smoothened gene, an essential component for Hh reception, suggesting that Disp is essential for Hh signaling. This conclusion was further supported by a detailed molecular analysis of Disp knockout mice, which exhibit defects characteristic of loss of Hh signaling. We also provide evidence that Disp is not required for Hh protein synthesis or processing, but rather for the movement of Hh protein from its sites of synthesis in mice. Taken together, our results reveal a conserved mechanism of Hh protein movement in Hh-producing cells that is essential for proper Hh signaling.