Midbrain dopaminergic neurons, whose loss in adults results in Parkinson's disease, can be specified during embryonic development by a contact-dependent signal from floor plate cells. Here we show that the amino-terminal product of Sonic hedgehog autoproteolysis (SHH-N), an inductive signal expressed by floor plate cells, can induce dopaminergic neurons in vitro. We show further that manipulations to increase the activity of cyclic AMP-dependent protein kinase A, which is known to antagonize hedgehog signaling, can block dopaminergic neuron induction by floor plate cells. Our results and those of other studies indicate that SHH-N can function in a dose-dependent manner to induce different cell types within the neural tube. Our results also provide the basis for a potential cell transplantation therapy for Parkinson's disease.