Hedgehog (Hh) signaling is involved in a wide range of important biological activities. Within the vertebrate central nervous system, Sonic Hedgehog (Shh) can act as a morphogen or mitogen that regulates the patterning, proliferation, and survival of neural stem cells (NSCs). However, its role in embryonic stem cell (ESC) neurogenesis has not been explored in detail. We have previously shown that Hh signaling is required for ESC neurogenesis. In order to elucidate the underlying mechanism, we utilized the Sox1-GFP ESC line, which has a green fluorescent protein (GFP) reporter under the control of the Sox1 gene promoter, providing an easy means of detecting NSCs in live cell culture. We show here that ESC differentiation in adherent culture follows the ESC--> primitive ectoderm --> neurectoderm transitions observed in vivo. Selective death of the Sox1-GFP-negative cells contributes to the enrichment of Sox1-GFP-positive NSCs. Interestingly, Shh is expressed exclusively by the NSCs themselves and elicits distinct downstream gene expression in Sox1-GFP-positive and -negative cells. Suppression of Hh signaling by antagonist treatment leads to different responses from these two populations as well: increased apoptosis in Sox1-GFP-positive NSCs and decreased proliferation in Sox1-GFP-negative primitive ectoderm cells. Hedgehog agonist treatment, in contrast, inhibits apoptosis and promotes proliferation of Sox1-GFP-positive NSCs. These results suggest that Hh acts as a mitogen and survival factor during early ESC neurogenesis, and evidence is presented to support a novel autocrine mechanism for Hh-mediated effects on NSC survival and proliferation.