Insulin gene expression in pancreatic β-cells is regulated by signals from developmental morphogen proteins known as hedgehogs (Hhs). By analyzing 5′-deletion insulin promoter-reporter constructs in transient transfections of clonal INS-1 β-cells, we located activating Hh-responsive regions within the rat insulin I promoter that include the glucose-response elements Far (E2) and Flat (A2/A3). Activation of Hh signaling in INS-1 cells by ectopic Hh expression increased (and inhibition of Hh signaling with the Hh-specific inhibitor cyclopamine decreased) transcriptional activation of a multimerized FarFlat enhancer-reporter construct. In DNA-binding studies, nuclear extracts from INS-1 cells activated by ectopic Hh expression increased (and extracts from INS-1 cells treated with cyclopamine decreased) protein binding to a radiolabeled FarFlat oligonucleotide probe. An antiserum directed against the transcription factor islet duodenum homeobox-1 (IDX-1), a regulator of pancreas development and activator of the insulin gene promoter, attenuated the binding activity of Hh-responsive protein complexes. Nuclear IDX-1 protein levels on Western blots were increased by ectopic Hh expression, thereby providing a mechanism for Hh-mediated regulation of the insulin promoter. Addition of cyclopamine to INS-1 cells decreased IDX-1 messenger RNA expression. In transient transfections of a− 4.5-kb mouse IDX-1 promoter-reporter construct, ectopic Hh expression increased (and cyclopamine administration decreased) transcriptional activation of the IDX-1 promoter in a dose-dependent manner. Thus, the IDX-1 gene is a direct regulatory target of Hh signaling in insulin-producing pancreatic β-cells. We propose that Hh signaling activates the insulin gene promoter indirectly via the direct activation of IDX-1 expression. Because IDX-1 gene expression is essential for insulin gene expression, pancreatic β-cell development, and normal glucose homeostasis, our findings that Hh signaling regulates IDX-1 expression in the endocrine pancreas suggest possible novel therapeutic approaches for diabetes mellitus.