Indian hedgehog (Ihh) has been previously found to regulate synovial joint formation. To analyze mechanisms, we carried out morphological, molecular, and cell fate map analyses of interzone and joint development in wild-type and Ihh(-/-) mouse embryo long bones. We found that Ihh(-/-) cartilaginous digit anlagen remained fused and lacked interzones or mature joints, whereas wrist skeletal elements were not fused but their joints were morphologically abnormal. E14.5 and E17.5 wild-type digit and ankle prospective joints expressed hedgehog target genes including Gli1 and Gli2 and interzone-associated genes including Gdf5, Erg, and tenascin-C, but expression of all these genes was barely detectable in mutant joints. For cell fate map analysis of joint progenitor cells, we mated Gdf5-Cre(+/-)/Rosa R26R(+/-) double transgenic mice with heterozygous Ihh(+/-) mice and monitored reporter beta-galactosidase activity and gene expression in triple-transgenic progeny. In control Gdf5-Cre(+/-)/R26R(+/-)/Ihh(+/-) limbs, reporter-positive cells were present in developing interzones, articulating layers, and synovial lining tissue and absent from underlying growth plates. In mutant Gdf5-Cre(+/-)/R26R(+/-)/Ihh(-/-) specimens, reporter-positive cells were present also. However, the cells were mostly located around the prospective and uninterrupted digit joint sites and, interestingly, still expressed Erg, tenascin-C, and Gdf5. Topographical analysis revealed that interzone and associated cells were not uniformly distributed, but were much more numerous ventrally. A similar topographical bias was seen for cavitation process and capsule primordia formation. In sum, Ihh is a critical and possibly direct regulator of joint development. In its absence, distribution and function of Gdf5-expressing interzone-associated cells are abnormal, but their patterning at prospective joint sites still occurs. The joint-forming functions of the cells appear to normally involve a previously unsuspected asymmetric distribution along the ventral-to-dorsal plane of the developing joint.