Sonic hedgehog (SHH) is an essential morphogenetic signal that dictates cell fate decisions in several developing organs in mammals. In vitro data suggest that SHH is required to specify LHX3⁺/LHX4⁺ Rathke's pouch (RP) progenitor identity. However, in vivo studies have failed to reveal such a function, supporting instead a crucial role for SHH in promoting proliferation of these RP progenitors and for differentiation of pituitary cell types. Here, we have used a genetic approach to demonstrate that activation of the SHH pathway is necessary to induce LHX3⁺/LHX4⁺ RP identity in mouse embryos. First, we show that conditional deletion of Shh in the anterior hypothalamus results in a fully penetrant phenotype characterised by a complete arrest of RP development, with lack of Lhx3/Lhx4 expression in RP epithelium at 9.0 days post coitum (dpc) and total loss of pituitary tissue by 12.5 dpc. Conversely, overactivation of the SHH pathway by conditional deletion of Ptch1 in RP progenitors leads to severe hyperplasia and enlargement of the Sox2⁺ stem cell compartment by the end of gestation.