Sonic hedgehog (SHH) is a master developmental regulator. In 1995, the SHH crystal structure predicted that SHH-E176 (human)/E177 (mouse) regulates signaling through a Zn2+-dependent mechanism. While Zn2+ is known to be required for SHH protein stability, a regulatory role for SHH-E176 or Zn2+ has not been described. Here, we show that SHH-E176/177 modulates Zn2+-dependent cross-linking in vitro and is required for endogenous signaling, in vivo. While ectopically expressed SHH-E176A is highly active, mice expressing SHH-E177A at endogenous sites (ShhE177A/-) are morphologically indistinguishable from mice lacking SHH (Shh-/-), with patterning defects in both embryonic spinal cord and forebrain. SHH-E177A distribution along the embryonic spinal cord ventricle is unaltered, suggesting that E177 does not control long-range transport. While SHH-E177A association with cilia basal bodies increases in embryonic ventral spinal cord, diffusely distributed SHH-E177A is not detected. Together, these results reveal a novel role for E177-Zn2+ in regulating SHH signaling that may involve critical, cilia basal-body localized changes in cross-linking and/or conformation.