Indian hedgehog (Ihh) has been reported to stimulate haematopoiesis ex vivo. In this study we studied the consequences of loss of function of Ihh for murine haematopoietic development. Ihh has no essential role in primitive erythropoiesis, but it is required in a non cell autonomous fashion for definitive erythropoieisis. Many components of the hedgehog signaling pathway are present in the fetal liver, with Ihh and Gli1 being most highly expressed in the stroma and Ptc1 being most highly expressed in haematopoietic stem and progenitor cells. Ihh knockout HSC and progenitor cell populations are produced in normal numbers in vivo and respond normally to haematopoietic cytokines in vitro, but terminal erythroid differentiation is defective leading to fatal anemia in mid gestation in many Ihh knockout embryos. These loss-of-function studies are consistent with previous gain-of-function studies which show Ihh can induce blood from ectoderm or expand HSCs in stroma-dependent culture.