Sonic hedgehog (Shh) is a morphogen secreted during early development that is required for the formation of the ventral neural tube, including the ventral forebrain. The prechordal source of Shh underlying the forebrain is required early to bifurcate the cerebral hemispheres and eye vesicles as well as to specify a rostroventral forebrain region, the hypothalamus. We hypothesized that Shh expressed later in the hypothalamus may be required for other known functions of Shh, such as patterning within a region, cell proliferation, cell specification, and axon guidance. To evaluate this hypothesis, Shh was genetically excised from the hypothalamus using a cre/loxp strategy: Shh brain enhancer 2 (SBE2), with specific activity in the hypothalamus, drove cre recombination of the Shh conditional allele. SBE2-cre;Shh^-/loxp mice (or Shh^Δhyp ) exhibited patterning abnormalities that resulted in morphologically abnormal hypothalamic ventral midline, pituitary, and optic nerve. The constellation of patterning defects and phenotypic abnormalities reflect the human disorder known as septo-optic dysplasia (SOD). These findings contribute to our understanding of the developmental mechanisms involved in proper formation of the hypothalamic-pituitary axis and the optic nerve, the two main aspects of the etiology of SOD.