Within the developing vertebrate nervous system, it is not known how progenitor cells interpret the positional information provided by inducing signals or how the domains in which distinct groups of neural cells differentiate are defined. Gli proteins may be involved in these processes. In the frog neural plate, we have previously shown that the zinc finger transcription factor Gli1 is expressed in midline cells and mediates the effects of Shh inducing floor plate differentiation. In contrast, Gli2 and Gli3 are expressed throughout the neural plate except for the midline. Here, it is shown that Gli3 and Shh repress each other whereas Gli2, like Gli1, is a target of Shh signaling. However, only Gli1 can induce the differentiation of floor plate cells. In addition, Gli2 and Gli3 repress the ectopic induction of floor plate cells by Gli1 in co-injection assays and inhibit endogenous floor plate differentiation. The definition of the floor plate domain, therefore, appears to be defined by the antagonizing activities of Gli2 and Gli3 on Gli1 function. Because both Gli1 and Gli2 are induced by Shh, these results establish a regulatory feedback loop triggered by Shh that restricts floor plate cells to the midline. We have also previously shown that the Gli genes induce neuronal differentiation and here it is shown that there is specificity to the types of neurons the Gli proteins induce. Only Gli1 induces Nkx2.1/TTF-1(+) ventral forebrain neurons. Moreover, Gli2 and Gli3 inhibit their differentiation. In contrast, the differentiation of spinal motor neurons can be induced by the two ventrally expressed Gli genes, Gli1 and Gli2, suggesting that Gli2 directly mediates induction of motor neurons by Shh. In addition, Gli3 inhibits motor neuron differentiation by Gli2. Thus, combinatorial Gli function may pattern the neural tube, integrating positional information and cell type differentiation.