Epithelial-mesenchymal interactions are required for tissue growth and gene expression patterns during odontogenesis. We showed previously that Sonic hedgehog (SHH) is detectable in both dental epithelium and mesenchyme, while Shh transcripts are present in dental epithelium only, suggesting that SHH functions as an autocrine signal in epithelium and a paracrine signal in mesenchyme. This hypothesis was tested here. We found by in situ hybridization that the SHH autocrine receptor Ptch-2 is indeed expressed in dental epithelium whereas the paracrine receptor Ptc is expressed in mesenchyme. Bovine bell stage tooth germs were microsurgically separated into epithelial and mesenchymal portions and the resulting tissue fragments were organ-cultured. In epithelium fragments cultured by themselves, gene expression of Shh and Gli-1 (a putative transcriptional mediator of hedgehog signaling) was significantly decreased in both inner dental epithelium and stratum intermedium layers; this was accompanied by a sharp drop in epithelial cell proliferation. However, in companion control tissue fragments containing both epithelium and mesenchyme, Shh and Gli-1 expression as well as cell proliferation were maintained. Treatment of dental epithelial or mesenchymal cell populations in monolayer cultures with exogenous recombinant SHH stimulated cell proliferation. Together, the data provide clear evidence that Shh is synthesized by dental epithelium, reaches the underlying mesenchyme, and appears to act as an autocrine mitogen for epithelial cells and a paracrine mitogen for mesenchymal cells, thus exerting crucial functions in tooth germ growth, morphogenesis, and tissue-tissue interactions of bell stage of odontogenesis.