Mutations in the Aristaless related homeodomain transcription factor (ARX) are associated with a diverse set of X-linked mental retardation and epilepsy syndromes in humans. Although most studies have been focused on its function in the forebrain, ARX is also expressed in other regions of the developing nervous system including the floor plate (FP) of the spinal cord where its function is incompletely understood. To investigate the role of Arx in the FP, we performed gain-of-function studies in the chick using in ovo electroporation, and loss-of-function studies in Arx-deficient mice. We have found that Arx, in conjunction with FoxA2, directly induces Sonic hedgehog (Shh) expression through binding to a Shh floor plate enhancer (SFPE2). We also observed that FoxA2 induces Arx through its transcriptional activation domain whereas Nkx2.2, induced by Shh, abolishes this induction. Our data support a feedback loop model for Arx function; through interactions with FoxA2, Arx positively regulates Shh expression in the FP, and Shh signaling in turn activates Nkx2.2, which suppresses Arx expression. Furthermore, our data are evidence that Arx plays a role as a context dependent transcriptional activator, rather than a primary inducer of Shh expression, potentially explaining how mutations in ARX are associated with diverse, and often subtle, defects.