The vertebrate zinc finger genes of the Gli family are homologs of the Drosophila gene cubitus interruptus. In frog embryos, Gli1 is expressed transiently in the prospective floor plate during gastrulation and in cells lateral to the midline during late gastrula and neurula stages. In contrast, Gli2 and Gli3 are absent from the neural plate midline with Gli2 expressed widely and Gli3 in a graded fashion with highest levels in lateral regions. In mouse embryos, the three Gli genes show a similar pattern of expression in the neural tube but are coexpressed throughout the early neural plate. Because Gli1 is the only Gli gene expressed in prospective floor plate cells of frog embryos, we have investigated a possible involvement of this gene in ventral neural tube development. Here we show that Shh signaling activates Gli1 transcription and that widespread expression of endogenous frog or human glioma Gli1, but not Gli3, in developing frog embryos results in the ectopic differentiation of floor plate cells and ventral neurons within the neural tube. Floor-plate-inducing ability is retained when cytoplasmic Gli1 proteins are forced into the nucleus or are fused to the VP16 transactivating domain. Thus, our results identify Gli1 as a midline target of Shh and suggest that it mediates the induction of floor plate cells and ventral neurons by Shh acting as a transcriptional regulator.