Embryonic Hedgehog signaling is essential for proper tissue morphogenesis and organ formation along the developing gastrointestinal tract. Hedgehog ligands are expressed throughout the endodermal epithelium at early embryonic stages but excluded from the region that will form the pancreas. Ectopic activation of Hedgehog signaling at the onset of pancreas development has been shown to inhibit organ morphogenesis. In contrast, Hedgehog signaling components are found within pancreatic tissue during subsequent stages of development as well as in the mature organ, indicating that a certain level of pathway activation is required for normal organ development and function. Here, we ectopically activate the Hedgehog pathway midway through pancreas development via expression of either Sonic (Shh) or Indian Hedgehog (Ihh) under control of the human Pax4-promoter. Similar pancreatic defects are observed in both Pax4-Shh and Pax4-Ihh transgenic lines, suggesting that regulation of the overall level of Hedgehog activity is critical for proper pancreas development. We also show that Hedgehog signaling controls mesenchymal vs. epithelial tissue differentiation and that pathway activation impairs formation of epithelial progenitors. Thus, tight control of Hedgehog pathway activity throughout embryonic development ensures proper pancreas organogenesis.