Defects such as cleft lip with or without cleft palate (CL/P) are among the most common craniofacial birth defects in humans. In many cases, the underlying molecular and cellular mechanisms that result in these debilitating anomalies remain largely unknown. Perturbed hedgehog (HH) signalling plays a major role in craniofacial development, and mutations in a number of pathway constituents underlie craniofacial disease. In particular, mutations in the gene encoding the major HH receptor and negative regulator, patched1 (PTCH1), are associated with both sporadic and familial forms of clefting, yet relatively little is known about how PTCH1 functions during craniofacial morphogenesis. To address this, we analysed the consequences of conditional loss of Ptch1 in mouse neural crest cell-derived facial mesenchyme. Using scanning electron microscopy (SEM) and live imaging of explanted facial primordia, we captured defective nasal pit invagination and CL in mouse embryos conditionally lacking Ptch1. Our analysis demonstrates interactions between HH and FGF signalling in the development of the upper lip, and reveals cell-autonomous and non-autonomous roles mediated by Ptch1. In particular, we show that deletion of Ptch1 in the facial mesenchyme alters cell morphology, specifically in the invaginating nasal pit epithelium. These findings highlight a critical link between the neural crest cells and olfactory epithelium in directing the morphogenesis of the mammalian lip and nose primordia. Importantly, these interactions are critically dependent on Ptch1 function for the prevention of orofacial clefts.