The gonad appears in the early embryo after several events: cells at the lateral plate mesoderm (LPM) undergo ingression, begin gonadal differentiation and then retain primordial germ cells (PGCs). Here we show that in the chicken embryo, these events are triggered on the basis of dorsoventral patterning at the medial LPM. Gonadal progenitor cells (GPCs) at the ventromedial LPM initiate gonadogenesis by undergoing ingression, whereas mesonephric capsule progenitor cells (MCPCs) at the dorsomedial LPM do not. These contrasting behaviours are caused by Hedgehog signalling, which is activated in GPCs but not in MCPCs. Inhibiting Hedgehog signalling prevents GPCs from forming gonadal structures and collecting PGCs. When activated by Hedgehog signalling, MCPCs form an ectopic gonad. This Hedgehog signalling is mediated by BMP4. These findings provide insight into embryonic patterning and gonadal initiation in the chicken embryo.