Sonic hedgehog (Shh) is a secreted morphogen that plays integral roles in the development of several brain and spinal cord regions. However, defining roles for Shh in the development of the hypothalamus has presented a challenge owing to its complex anatomy and neuronal heterogeneity. Of particular interest is the tuberal hypothalamus, a brain region with important homeostatic function. Early deletions of Shh from non-neuronal sources result in a severe brain malformation similar to a condition termed Holoprosenecehpaly in humans. In mouse models of this disorder, the hypothalamus fails to form. Later disruptions of Shh signaling within the hypothalamus itself implicate the hypothalamic source of Shh in proper development of the optic nerve and pituitary in addition to the hypothalamus. These phenotypes are associated with another disorder in patients termed Septo-optic dysplasia. We use conditional deletion models in mice to further define requirements for dynamic Shh activity at distinct stages of tuberal hypothalamic development. We find tuberal hypothalamic nuclei are dependent on early roles for Shh in dorsoventral patterning, neurogenesis, and restricting ventral midline area. We then utilize fate mapping techniques to demonstrate that Shh expressing and responsive progenitors contribute to distinct neuronal subtypes, accounting for some of the cellular heterogeneity in tuberal hypothalamic nuclei. Conditional deletion of the Hedgehog transducer Smoothened (Smo) at time points after dorsoventral patterning has been established reveals that Shh signaling is necessary to maintain proliferation and progenitor identity during peak periods of hypothalamic neurogenesis. We also find that mosaic disruption of Smo causes a non-cell autonomous gain in Shh signaling activity in neighboring wild type cells, suggesting a possible mechanism for the growth of hypothalamic hamartomas, a benign tumor that forms at fetal stages of hypothalamic development.