Sonic hedgehog (Shh) is a crucial morphogen in the development of numerous tissues and organs, including the nervous system, gastrointestinal tract and lung. Recent findings suggest that Shh plays an important role in thymocyte development and peripheral T cell function. Here we report that the Shh receptors, patched and smoothened, are expressed in resting and activated T cells and their expression is regulated upon T cell activation. Shh protein is also detected on the surface of freshly isolated T cells. Although exogenous Shh alone does not activate resting T cells, it exhibits co-stimulatory activity which is reflected in its ability to potentiate CD3-mediated proliferation and cytokine production by CD4(+) T cells. The co-stimulatory effect is most prominent at sub-optimal TCR stimulation level. Gene expression analysis reveals that Shh signaling in CD4(+) T cells modulates a different set of transcriptional targets from that in neuronal cells. Furthermore, Shh co-stimulation modulates the expression of a subset of CD28-responsive genes, including cyclin A and B cell translocation gene 2.