Genetic analyses in Drosophila have demonstrated that a transmembrane protein Dispatched (Disp) is required for the release of lipid-modified Hedgehog (Hh) protein from Hh secreting cells. Analysis of Disp1 null mutant embryos has demonstrated that Disp1 plays a key role in hedgehog signaling in the early mouse embryo. Here we have used a hypomorphic allele in Disp1(Disp1Δ2), to extend our knowledge of Disp1 function in Hh-mediated patterning of the mammalian embryo. Through genetic combinations with null alleles of patched 1 (Ptch1),sonic hedgehog (Shh) and Indian hedgehog (Ihh), we demonstrate that Disp1 genetically interacts with Hh signaling components. As Disp1 activity is decreased we see a progressive increase in the severity of hedgehog-dependent phenotypes, which is further enhanced by reducing hedgehog ligand levels. Analysis of neural tube patterning demonstrates a progressive loss of ventral cell identities that most likely reflects decreased Shh signaling as Disp1 levels are attenuated. Conversely,increasing available Shh ligand by decreasing Ptch1 dosage leads to the restoration of ventral cell types in Disp1Δ2/Δ2 mutants. Together, these studies suggest that Disp1 actively regulates the levels of hedgehog ligand that are available to the hedgehog target field. Further, they provide additional support for the dose-dependent action of Shh signaling in patterning the embryo. Finally, in-vitro studies on Disp1 null mutant fibroblasts indicate that Disp1 is not essential for membrane targeting or release of lipid-modified Shh ligand.