The heparin sulfate proteoglycan Terribly Reduced Optic Lobes (Trol) is the Drosophila melanogaster homolog of the vertebrate protein Perlecan. Trol is expressed as part of the extracellular matrix (ECM) found in the hematopoietic organ, called the lymph gland. In the normal lymph gland, the ECM forms thin basement membranes around individual or small groups of blood progenitors. The pattern of basement membranes, reported by Trol expression, is spatio-temporally correlated to hematopoiesis. The central, medullary zone which contain undifferentiated hematopoietic progenitors has many, closely spaced membranes. Fewer basement membranes are present in the outer, cortical zone, where differentiation of blood cells takes place. Loss of trol causes a dramatic change of the ECM into a three-dimensional, spongy mass that fills wide spaces scattered throughout the lymph gland. At the same time proliferation is reduced, leading to a significantly smaller lymph gland. Interestingly, differentiation of blood progenitors in trol mutants is precocious, resulting in the break-down of the usual zonation of the lymph gland. which normally consists of an immature center (medullary zone) where cells remain undifferentiated, and an outer cortical zone, where differentiation sets in. We present evidence that the effect of Trol on blood cell differentiation is mediated by Hedgehog (Hh) signaling, which is known to be required to maintain an immature medullary zone. Overexpression of hh in the background of a trol mutation is able to rescue the premature differentiation phenotype. Our data provide novel insight into the role of the ECM component Perlecan during Drosophila hematopoiesis.