The mammalian thalamus is located in the diencephalon and is composed of dozens of morphologically and functionally distinct nuclei. The majority of these nuclei project axons to the neocortex in unique patterns and play critical roles in sensory, motor, and cognitive functions. It has been assumed that the adult thalamus is derived from neural progenitor cells located within the alar plate of the caudal diencephalon. Nevertheless, how a distinct array of postmitotic thalamic nuclei emerge from this single developmental unit has remained largely unknown. Our recent studies found that these thalamic nuclei are in fact derived from molecularly heterogeneous populations of progenitor cells distributed within at least two distinct progenitor domains in the caudal diencephalon. In this study, we investigated how such molecular heterogeneity is established and maintained during early development of the thalamus and how early signaling mechanisms influence the formation of postmitotic thalamic nuclei. By using mouse genetics and in utero electroporation, we provide evidence that Sonic hedgehog (Shh), which is normally expressed in ventral and rostral borders of the embryonic thalamus, plays a crucial role in patterning progenitor domains throughout the thalamus. We also show that increasing or decreasing Shh activity causes dramatic reorganization of postmitotic thalamic nuclei through altering the positional identity of progenitor cells.