The cortex and basal ganglia are the major structures of the adult brain derived from the embryonic telencephalon. Two morphologically distinct regions of the basal ganglia are evident within the mature ventral telencephalon, the globus pallidus medially, and the striatum, which is positioned between the globus pallidus and the cortex. Deletion of the Sonic Hedgehog gene in mice indicates that this secreted signaling molecule is vital for the generation of both these ventral telencephalic regions. Previous experiments showed that Sonic Hedgehog induces differentiation of ventral neurons characteristic of the medial ganglionic eminence, the embryonic structure which gives rise to the globus pallidus. In this paper, we show that later in development, Sonic Hedgehog induces ventral neurons with patterns of gene expression characteristic of the lateral ganglionic eminence. This is the embryonic structure from which the striatum is derived. These results suggest that temporally regulated changes in Sonic Hedgehog responsiveness are integral in the sequential induction of basal telencephalic structures.