Sonic hedgehog (Shh) is a secreted morphogen that regulates dorso-ventral patterning within the neural tube during embryonic development. It is well established that Shh can induce motor-neuron differentiation that coincides with the appearance of specific motor-neuron markers including chicken ovalbumin upstream promoter-transcription factor II (COUP-TFII) and Isl1. However, the mechanism of Shh-induced signaling pathway in vertebrates is not clearly defined. In this report we have identified COUP-TFII as a target gene for Shh. In addition we have used a 1.6-kb region of the COUP-TFII promoter to identify a target element that mediates the Shh-induced activity. Extensive deletions introduced within this region have further enabled us to identify a novel sonic hedgehog response element (ShhRE) in the COUP-TFII promoter. Point mutations introduced within the ShhRE reveal some key nucleotides that are essential for protein(s)-binding activity. Finally, the ShhRE is capable of functioning as a true enhancer element and can mediate Shh-induced transactivation of reporter gene via a heterologous promoter.