The secreted Hedgehog (Hh) proteins have been implicated as mediators of positional information in vertebrates and invertebrates. A gradient of Hh activity contributes to antero-posterior (A/P) patterning of the fly wing. In addition to inducing localised expression of Decapentaplegic (Dpp), which in turn relays patterning cues at long range, Hh directly patterns the central region of the wing.We show that short-range, dose-dependent Hh activity is mediated by activation of the transcription factor Collier (Col). In the absence of col activity, longitudinal veins 3 and 4 (L3 and L4) are apposed and the central intervein is missing. Hh expression induces col expression in a narrow stripe of cells along the A/P boundary through a dual-input mechanism: inhibition of proteolysis of Cubitus-interruptus (Ci) and activation of the Fused (Fu) kinase. Col, in cooperation with Ci, controls the formation of the central intervein by activating the expression of blistered (bs), which encodes the Drosophila serum response factor (D-SRF), the activity of which is required for the adoption and maintenance of the intervein cell fate. Furthermore, col is allelic to knot, a gene involved in the formation of the central part of the wing. This finding completes our understanding of the sectorial organisation of the Drosophila wing.Col, the Drosophila member of the COE family (Col/Olf-1/EBF) of non-basic, helix-loop-helix (HLH)-containing transcription factors, is a mediator of the short-range organising activity of Hh in the Drosophila wing. Our results support the idea that Hh controls target gene expression in a concentration-dependent manner and highlight the importance of the Fu kinase in this differential regulation. The high degree of evolutionary conservation of the COE proteins and the diversity of developmental processes controlled by Hh signalling raises the possibility that the specific genetic interactions depicted here may also operate in vertebrates.