In the Drosophila ovary, hedgehog (hh) signaling from cells near the apical tip of the germarium stimulates the proliferation and specification of somatic cells in region 2 of the germarium, 2-5 cells away from the hh-expressing cells (A. J. Forbes, H. Lin, P. Ingham and A. Spradling (1996) Development 122, 1125-1135). This report examines the role during early oogenesis of several genes that are known to function in hh-mediated signaling during embryonic and larval development (P. Ingham (1995) Current Opin. Genetics Dev. 5, 528-534). As in imaginal discs, engrailed (en) is co-expressed with hh in the germarium, while patched (ptc) and cubitus interruptus (ci) are expressed in somatic cells throughout the germarium and in developing egg chambers, with ptc expression being elevated within 10 cell diameters of the source of the hh signal. Moreover, the somatic cell overproliferation caused by ectopic hh expression is accompanied by elevated levels of ptc and is phenocopied in ptc- somatic clones. These analyses suggest that ptc and ci are components of the hh signaling pathway in the germarium. However, unlike embryos and imaginal discs, neither wingless (wg) nor decapentaplegic (dpp) appear to mediate the ovarian hh signal. wg is expressed in 'cap cells,' a subset of hh-expressing cells located adjacent to germ-line stem cells, but is unaffected by ectopic hh expression. Nor does the ectopic expression of wg or dpp mimic the effect of ectopic hh expression. We propose that Hh diffuses from apical cells, including cap cells, and regulates the proliferation of nearby ovarian somatic cells by antagonizing the negative effects of ptc on ci activity in these cells, thereby allowing the transcription of ci-dependent genes, including ptc itself.