Hedgehog (Hh) signaling plays a major role in multiple aspects of embryonic development. A key issue in Hh signaling is to elucidate the molecular mechanism by which a Hh protein morphogen gradient is formed despite its membrane association. In this study, we used a combination of genetic, cellular, and biochemical approaches to address the role of lipid modifications in long-range vertebrate Hh signaling. Our molecular analysis of knockout mice deficient in Skn, the murine homolog of the Drosophila ski gene, which catalyzes Hh palmitoylation, and gene-targeted mice producing a nonpalmitoylated form of Shh indicates that Hh palmitoylation is essential for its activity as well as the generation of a protein gradient in the developing embryos. Furthermore, our biochemical data show that Hh lipid modifications are required for producing a soluble multimeric protein complex, which constitutes the major active component for Hh signaling. These results suggest that soluble Hh multimeric complex travels in the morphogenetic field to activate Hh signaling in distant Hh-responsive cells.