Neural crest cells that form the vertebrate head skeleton migrate and interact with surrounding tissues to shape the skull, and defects in these processes underlie many human craniofacial syndromes. Signals at the midline play a crucial role in the development of the anterior neurocranium, which forms the ventral braincase and palate, and here we explore the role of Hedgehog (Hh) signaling in this process. Using sox10:egfp transgenics to follow neural crest cell movements in the living embryo, and vital dye labeling to generate a fate map, we show that distinct populations of neural crest form the two main cartilage elements of the larval anterior neurocranium: the paired trabeculae and the midline ethmoid. By analyzing zebrafish mutants that disrupt sonic hedgehog (shh) expression, we demonstrate that shh is required to specify the movements of progenitors of these elements at the midline, and to induce them to form cartilage. Treatments with cyclopamine, to block Hh signaling at different stages, suggest that although requirements in morphogenesis occur during neural crest migration beneath the brain, requirements in chondrogenesis occur later, as cells form separate trabecular and ethmoid condensations. Cell transplantations indicate that these also reflect different sources of Shh, one from the ventral neural tube that controls trabecular morphogenesis and one from the oral ectoderm that promotes chondrogenesis. Our results suggest a novel role for Shh in the movements of neural crest cells at the midline, as well as in their differentiation into cartilage, and help to explain why both skeletal fusions and palatal clefting are associated with the loss of Hh signaling in holoprosencephalic humans.