Members of the Hedgehog family of secreted proteins control a number of important inductive interactions in the development of both vertebrates and Drosophila, but little is known about the ways in which their signalling activities are transduced. In Drosophila, hedgehog is one of the segment-polarity genes, mutations of which disrupt the pattern and polarity of individual embryonic segments and their adult derivatives; several of these genes have been implicated in transduction of the hedgehog signal. Here we show that the segment-polarity gene smoothened is required for the response of cells to hedgehog signalling during the development of both the embryonic segments and imaginal discs. Sequence analysis of the smoothened transcription unit reveals a single open reading frame encoding a protein with seven putative transmembrane domains. This structure is typical of G-protein-coupled receptors, suggesting that the Smoothened protein may act as a receptor for the Hedgehog ligand.