Fgf8 signalling is known to play an important role during patterning of the first pharyngeal arch, setting up the oral region of the head and then defining the rostral and proximal domains of the arch. The mechanisms that regulate the restricted expression of Fgf8 in the ectoderm of the developing first arch, however, are not well understood. It has become apparent that pharyngeal endoderm plays an important role in regulating craniofacial morphogenesis. Endoderm ablation in the developing chick embryo results in a loss of Fgf8 expression in presumptive first pharyngeal arch ectoderm. Shh is locally expressed in pharyngeal endoderm, adjacent to the Fgf8-expressing ectoderm, and is thus a candidate signal regulating ectodermal Fgf8 expression. We show that in cultured explants of presumptive first pharyngeal arch, loss of Shh signalling results in loss of Fgf8 expression, both at early stages before formation of the first arch, and during arch formation. Moreover, following removal of the endoderm, Shh protein can replace this tissue and restore Fgf8 expression. Overexpression of Shh in the non-oral ectoderm leads to an expansion of Fgf8, affecting the rostral-caudal axis of the developing first arch, and resulting in the formation of ectopic cartilage. Shh from the pharyngeal endoderm thus regulates Fgf8 in the ectoderm and the role of the endoderm in pharyngeal arch patterning may thus be indirectly mediated by the ectoderm.