We here identify and characterize an extracellular modulator of Hedgehog signaling in Drosophila, Shifted. Shifted is required for high levels of long-range signaling in the developing wing imaginal disc. Surprisingly, shifted encodes the only Drosophila ortholog of the secreted vertebrate protein Wnt Inhibitory Factor-1 (WIF-1), whose known role is to bind to extracellular Wnts and inhibit their activity. However, Shifted does not regulate Hedgehog signaling by affecting Wingless or Wnt signaling. We show instead that Shifted is a secreted protein that acts over a long distance and is required for the normal accumulation of Hh protein and its movement in the wing. Our data further indicate that Shf interacts with Hh and the heparan sulfate proteoglycans. Therefore, we propose that Shf stabilizes the interaction between Hh and the proteoglycans, an unexpected role for a member of the WIF-1 family.