Stem cells reside in specialised microenvironments, or niches, which often contain support cells that control stem cell maintenance and proliferation. Hedgehog (Hh) proteins mediate homeostasis in several adult niches, but a detailed understanding of Hh signalling in stem cell regulation is lacking. Studying the Drosophila female germline stem cell (GSC) niche, we show that Hh acts as a critical juxtacrine signal to maintain the normal GSC population of the ovary. Hh production in cap cells, a type of niche support cells, is regulated by the Engrailed transcription factor. Hh is then secreted to a second, adjacent population of niche cells, the escort cells, where it activates transcription of the GSC essential factors Decapentaplegic (Dpp) and Glass bottom boat (Gbb). In wild-type niches, Hh protein decorates short filopodia that originate in the support cap cells and that are functionally relevant, as they are required to transduce the Hh pathway in the escort cells and to maintain a normal population of GSCs. These filopodia, reminiscent of wing disc cytonemes, grow several fold in length if Hh signalling is impaired within the niche. Because these long cytonemes project directionally towards the signalling-deficient region, cap cells sense and react to the strength of Hh pathway transduction in the niche. Thus, the GSC niche responds to insufficient Hh signalling by increasing the range of Hh spreading. Although the signal(s) perceived by the cap cells and the receptor(s) involved are still unknown, our results emphasise the integration of signals necessary to maintain a functional niche and the plasticity of cellular niches to respond to challenging physiological conditions.