Dally and Notum regulate the switch between low and high level Hedgehog pathway signalling.

During development, secreted morphogens, such as Hedgehog (Hh), control cell fate and proliferation. Precise sensing of morphogen levels and dynamic cellular responses are required for morphogen-directed morphogenesis, yet the molecular mechanisms responsible are poorly understood. Several recent studies have suggested the involvement of a multi-protein Hh reception complex, and have hinted at an understated complexity in Hh sensing at the cell surface. We show here that the expression of the proteoglycan Dally in Hh-receiving cells in Drosophila is necessary for high but not low level pathway activity, independent of its requirement in Hh-producing cells. We demonstrate that Dally is necessary to sequester Hh at the cell surface and to promote Hh internalisation with its receptor. This internalisation depends on both the activity of the hydrolase Notum and the glycosyl-phosphatidyl-inositol (GPI) moiety of Dally, and indicates a departure from the role of the second glypican Dally-like in Hh signalling. Our data suggest that hydrolysis of the Dally-GPI by Notum provides a switch from low to high level signalling by promoting internalisation of the Hh-Patched ligand-receptor complex.