In vertebrates, the hedgehog family of cell signaling proteins and associated downstream network components play an essential role in mediating tissue interactions during development and organogenesis. Loss-of-function or misexpression mutation of hedgehog network components can cause birth defects, skin cancer and other tumors. The mammary gland is a specialized skin derivative requiring epithelial-epithelial and epithelial-stromal tissue interactions similar to those required for development of other organs, where these interactions are often controlled by hedgehog signaling. We have investigated the role of the Patched-1 (Ptc1) hedgehog receptor gene in mammary development and neoplasia. Haploinsufficiency at the Ptc1 locus results in severe histological defects in ductal structure, and minor morphological changes in terminal end buds in heterozygous postpubescent virgin animals. Defects are mainly ductal hyperplasias and dysplasias characterized by multilayered ductal walls and dissociated cells impacting ductal lumens. This phenotype is 100% penetrant. Remarkably, defects are reverted during late pregnancy and lactation but return upon involution and gland remodeling. Whole mammary gland transplants into athymic mice demonstrates that the observed dysplasias reflect an intrisic developmental defect within the gland. However, Ptc1-induced epithelial dysplasias are not stable upon transplantation into a wild-type epithelium-free fat pad, suggesting stromal (or epithelial and stromal) function of Ptc1. Mammary expression of Ptc1 mRNA is both epithelial and stromal and is developmentally regulated. Phenotypic reversion correlates with developmentally regulated and enhanced expression of Indian hedgehog (Ihh) during pregnancy and lactation. Data demonstrate a critical mammary role for at least one component of the hedgehog signaling network and suggest that Ihh is the primary hedgehog gene active in the gland.