Despite extensive studies, there are still many unanswered questions regarding the mechanism of hedgehog signaling and the phylogenic conservation of hedgehog function in vertebrates. For example, whether hedgehog signaling in vertebrates requires smoothened is unclear, and the role of hedgehog activity in zebrafish is controversial. We show that inactivation of smoothened by retroviral insertions in zebrafish results in defects that are characteristic of hedgehog deficiencies, including abnormalities in body size, the central nervous system, adaxial mesoderm, cartilage and pectoral fins. We demonstrate that, as in Drosophila, vertebrate smoothened is essential for hedgehog signaling, and functions upstream of protein kinase A. Further analysis of neural tube defects revealed the absence of lateral floor plate and secondary motoneurons, but the presence of medial floor plate and primary motoneurons in smoothened mutant embryos. Blocking maternal hedgehog signaling by cyclopamine eliminates primary motoneurons, but not medial floor plate. Interestingly, even after inhibition of maternal hedgehog activity, the midbrain dopaminergic neurons still form, and looping of the heart does not randomize in the mutants. We also found decreased proliferation and increased apoptosis in the mutants. Taken together, these data demonstrate the conserved role of vertebrate smoothened in the hedgehog signaling pathway, and reveal similarities and differences of hedgehog function between teleosts and amniotes.