The Hedgehog signalling pathway is essential for the development of diverse tissues during embryogenesis. Signalling is activated by binding of Hedgehog protein to the multipass membrane protein Patched (Ptc). We have now identified a novel component in the vertebrate signalling pathway, which we name Hip (for Hedgehog-interacting protein) because of its ability to bind Hedgehog proteins. Hip encodes a membrane glycoprotein that binds to all three mammalian Hedgehog proteins with an affinity comparable to that of Ptc-1. Hip-expressing cells are located next to cells that express each Hedgehog gene. Hip expression is induced by ectopic Hedgehog signalling and is lost in Hedgehog mutants. Thus, Hip, like Ptc-1, is a general transcriptional target of Hedgehog signalling. Overexpression of Hip in cartilage, where Indian hedgehog (Ihh) controls growth, leads to a shortened skeleton that resembles that seen when Ihh function is lost (B. St-Jacques, M. Hammerschmidt & A.P.M., in preparation). Our findings support a model in which Hip attenuates Hedgehog signalling as a result of binding to Hedgehog proteins: a negative regulatory feedback loop established in this way could thus modulate the responses to any Hedgehog signal.