The secreted protein sonic hedgehog (Shh) is required to establish patterns of cellular growth and differentiation within ventral regions of the developing CNS. The expression of Shh in the two tissue sources responsible for this activity, the axial mesoderm and the ventral midline of the neural tube, is regulated along the anteroposterior neuraxis. Separate cis-acting regulatory sequences have been identified which direct Shh expression to distinct regions of the neural tube, supporting the view that multiple genes are involved in activating Shh transcription along the length of the CNS. We show here that the activity of one Shh enhancer, which directs reporter expression to portions of the ventral midbrain and diencephalon, overlaps both temporally and spatially with the expression of Sim2. Sim2 encodes a basic helix-loop-helix (bHLH-PAS) PAS domain containing transcriptional regulator whose Drosophila homolog, single-minded, is a master regulator of ventral midline development. Both vertebrate and invertebrate Sim family members were found sufficient for the activation of the Shh reporter as well as endogenous Shh mRNA. Although Shh expression is maintained in Sim2(-)(/)(-) embryos, it was determined to be absent from the rostral midbrain and caudal diencephalon of embryos carrying a dominant-negative transgene that disrupts the function of bHLH-PAS proteins. Together, these results suggest that bHLH-PAS family members are required for the regulation of Shh transcription within aspects of the ventral midbrain and diencephalon.