Sulfs are secreted sulfatases that catalyse removal of sulfate from Heparan Sulfate Proteoglycans (HSPGs) in the extracellular space. These enzymes are well known to regulate a number of crucial signalling pathways during development. In this study, we report that DSulfatase-1 (DSulf1), the unique Drosophila Sulf protein, is a regulator of Hedgehog (Hh) signalling during wing development. DSulf1 activity is required in both Hh source and Hh receiving cells for proper positioning of Hh target gene expression boundaries. As assessed by loss- and gain-of-function experiments in specific compartments, DSulf1 displays dual functions with respect to Hh signalling, acting as a positive regulator in Hh producing cells and a negative regulator in Hh receiving cells. In either domain, DSulf1 modulates Hh distribution by locally lowering the concentration of the morphogen at the apical pole of wing disc cells. Thus, we propose that DSulf1, by its desulfation catalytic activity, lowers Hh/HSPG interaction in both Hh source and target fields, thereby enhancing Hh release from its source of production and reducing Hh signalling activity in responding cells. Finally, we show that Dsulf1 pattern of expression is temporally regulated and depends on EGFR signalling, a Hh-dependent secondary signal in this tissue. Our data reveal a novel Hh regulatory feedback loop, involving DSulf1, which contributes to maintain and stabilise expression domains of Hh target genes during wing disc development.