Sonic hedgehog (SHH) signaling plays a pivotal role in 2 different phases during brain development. Early SHH signaling derived from the prechordal plate (PrCP) triggers secondary Shh induction in the forebrain, which overlies the PrCP, and the induced SHH signaling, in turn, directs late neuronal differentiation of the forebrain. Consequently, Shh regulation in the PrCP is crucial for initiation of forebrain development. However, no enhancer that regulates prechordal Shh expression has yet been found. Here, we identified a prechordal enhancer, named SBE7, in the vicinity of a cluster of known forebrain enhancers for Shh. This enhancer also directs Shh expression in the ventral midline of the forebrain, which receives the prechordal SHH signal. Thus, the identified enhancer acts not only for the initiation of Shh regulation in the PrCP but also for subsequent Shh induction in the forebrain. Indeed, removal of the enhancer from the mouse genome markedly down-regulated the expression of Shh in the rostral domains of the axial mesoderm and in the ventral midline of the forebrain and hypothalamus in the mouse embryo, and caused a craniofacial abnormality similar to human holoprosencephaly (HPE). These findings demonstrate that SHH signaling mediated by the newly identified enhancer is essential for development and growth of the ventral midline of the forebrain and hypothalamus. Understanding of the Shh regulation governed by this prechordal and brain enhancer provides an insight into the mechanism underlying craniofacial morphogenesis and the etiology of HPE.