The steroidal alkaloid cyclopamine produces cyclopia and holoprosencephaly when administered to gastrulation-stage amniote embryos. Cyclopamine-induced malformations in chick embryos are associated with interruption of Sonic hedgehog (Shh)-mediated dorsoventral patterning of the neural tube and somites. Cell types normally induced in the ventral neural tube by Shh are either absent or appear aberrantly at the ventral midline after cyclopamine treatment, while dorsal cell types normally repressed by Shh appear ventrally. Somites in cyclopamine-treated embryos show Pax7 expression throughout, indicating failure of sclerotome induction. Cyclopamine at concentrations of 20–100 nM blocks the response of neural plate explants to recombinant Shh-N in a dose-dependent manner. Similar concentrations have no effect on the post-translational modification of Shh by cholesterol in transfected COS-1 cells. Comparison of the effects of cyclopamine to those of the holoprosencephaly-inducing cholesterol synthesis inhibitor AY-9944 shows that cyclopamine does not induce malformations by interfering with cholesterol metabolism. Although AY-9944 does not interrupt Shh signaling in ovo, it blocks the response to Shh-N in explants cultured without an exogenous cholesterol source. As predicted by current models of the regulation of cholesterol metabolism, the response to Shh-N in AY-9944-treated explants is restored by providing exogenous cholesterol. However, exogenous cholesterol does not restore Shh signaling in cyclopamine-treated explants. These findings suggest that cyclopamine-induced teratogenesis is due to a more direct antagonism of Shh signal transduction.