In the developing skeleton, dermal bone morphogenesis includes the balanced proliferation, recruitment and differentiation of osteoblast precursors, yet how bones acquire unique morphologies is unknown. We show that Hedgehog (Hh) signaling mediates bone shaping during early morphogenesis of the opercle (Op), a well characterized dermal bone of the zebrafish craniofacial skeleton. ihha is specifically expressed in a local population of active osteoblasts along the principal growing edge of the bone. Mutational studies show that Hh signaling by this osteoblast population is both necessary and sufficient for full recruitment of pre-osteoblasts into the signaling population. Loss of ihha function results in locally reduced proliferation of pre-osteoblasts and consequent reductions in recruitment into the osteoblast pool, reduced bone edge length and reduced outgrowth. Conversely, hyperactive Hh signaling in ptch1 mutants causes opposite defects in proliferation and growth. Time-lapse microscopy of early Op morphogenesis using transgenically labeled osteoblasts demonstrates that ihha-dependent bone development is not only region specific, but also begins exactly at the onset of a second phase of morphogenesis, when the early bone begins to reshape into a more complex form. These features strongly support a hypothesis that dermal bone development is modular, with different gene sets functioning at specific times and locations to pattern growth. The Hh-dependent module is not limited to this second phase of bone growth: during later larval development, the Op is fused along the dysmorphic edge to adjacent dermal bones. Hence, patterning within a module may include adjacent regions of functionally related bones and might require that signaling pathways function over an extended period of development.