Cholesterol regulates Hedgehog (Hh) signaling during early vertebrate development. Smith-Lemli-Opitz syndrome (SLOS) is caused by defects in 7-dehydrocholesterol reductase (DHCR7), an enzyme catalyzing the final step of cholesterol biosynthesis. Many developmental malformations attributed to SLOS occur in tissues and organs where Hh signaling is required for development,but the precise role of DHCR7 deficiency in this disease remains murky. We report that DHCR7 and Sonic Hedgehog (Shh) are co-expressed during midline development in Xenopus embryos. DHCR7 has previously been implicated to function as a positive regulator of Hh signaling that acts to regulate the cholesterol adduction of Hh ligand or to affect Hh signaling in the responding cell. We present gain- and loss-of-function analyses suggesting that DHCR7 functions as a negative regulator of Hh signaling at the level or downstream of Smoothened (Smo) and affects intracellular Hh signaling. Our analysis also raises the possibility that the human condition SLOS is caused not only by disruption of the enzymatic role of DHCR7 as a reductase in cholesterol biosynthesis, but may also involve defects in DHCR7 resulting in derepression of Shh signaling.