Hedgehog (Hh) signalling is important in development, stem cell biology and disease. In a variety of tissues, Hh acts as a morphogen to regulate growth and cell fate specification. Several hypotheses have been proposed to explain morphogen movement, one of which is transport along filopodia-like protrusions called cytonemes. Here, we analyse the mechanism underlying Hh movement in the wing disc and the abdominal epidermis of Drosophila melanogaster. We show that, in both epithelia, cells generate cytonemes in regions of Hh signalling. These protrusions are actin-based and span several cell diameters. Various Hh signalling components localize to cytonemes, as well as to punctate structures that move along cytonemes and are probably exovesicles. Using in vivo imaging, we show that cytonemes are dynamic structures and that Hh gradient establishment correlates with cytoneme formation in space and time. Indeed, mutant conditions that affect cytoneme formation reduce both cytoneme length and Hh gradient length. Our results suggest that cytoneme-mediated Hh transport is the mechanistic basis for Hh gradient formation.