Abstract Background The mammalian amygdala is composed of two primary functional subdivisions, classified according to whether the major output projection of each nucleus is excitatory or inhibitory. The posterior dorsal and ventral subdivisions of the medial amygdala, which primarily contain inhibitory output neurons, modulate specific aspects of innate socio-sexual and aggressive behaviors. However, the development of the neuronal diversity of this complex and important structure remains to be fully elucidated. Results Using a combination of genetic fate-mapping and loss-of-function analyses, we examined the contribution and function of Sonic hedgehog (Shh)-expressing and Shh-responsive (Nkx2-1 + and Gli1 +) neurons in the medial amygdala. Specifically, we found that Shh- and Nkx2-1-lineage cells contribute differentially to the dorsal and ventral subdivisions of the postnatal medial amygdala. These Shh- and Nkx2-1-lineage neurons express overlapping and non-overlapping inhibitory neuronal markers, such as Calbindin, FoxP2, nNOS and Somatostatin, revealing diverse fate contributions in discrete medial amygdala nuclear subdivisions. Electrophysiological analysis of the Shh-derived neurons additionally reveals an important functional diversity within this lineage in the medial amygdala. Moreover, inducible Gli1CreER(T2) temporal fate mapping shows that early-generated progenitors that respond to Shh signaling also contribute to medial amygdala neuronal diversity. Lastly, analysis of Nkx2-1 mutant mice demonstrates a genetic requirement for Nkx2-1 in inhibitory neuronal specification in the medial amygdala distinct from the requirement for Nkx2-1 in cerebral cortical development. Conclusions Taken together, these data reveal a differential contribution of Shh-expressing and Shh-responding cells to medial amygdala neuronal diversity as well as the function of Nkx2-1 in the development of this important limbic system structure.