The identity and patterning of ventral cell types in the vertebrate central nervous system depends on cell interactions. For example, induction of a specialized population of ventral midline cells, the floor plate, appears to require contact-mediated signalling by the underlying notochord, whereas diffusible signals from the notochord and floor plate can induce ventrolaterally positioned motor neurons. Sonic hedgehog (Shh), a vertebrate hedgehog-family member, is processed to generate two peptides (M(r) 19K and 26/27K) which are secreted by both of these organizing centres. Moreover, experiments in a variety of vertebrate embryos, and in neural explants in vitro, indicate that Shh can mediate floor-plate induction. Here we have applied recombinant Shh peptides to neural explants in serum-free conditions. High concentrations of Shh bound to a matrix induce floor plate and motor neurons, and addition of Shh to the medium leads to dose-dependent induction of motor neurons. All inducing activity resides in a highly conserved amino-terminal peptide (M(r) 19K). Moreover, antibodies that specifically recognize this peptide block induction of motor neurons by the notochord. We propose that Shh acts as a morphogen to induce distinct ventral cell types in the vertebrate central nervous system.