Sonic hedgehog (Shh) signaling occurs concurrently with the many processes that constitute nervous system development. Although Shh is mostly known for its proliferative and morphogenic action through its effects on neural stem cells and progenitors, it also contributes to neuronal differentiation, axonal pathfinding and synapse formation and function. To participate in these diverse events, Shh signaling manifests differently depending on the maturational state of the responsive cell, on the other signaling pathways regulating neural cell function and the environmental cues that surround target cells. Shh signaling is particularly dynamic in the nervous system, ranging from canonical transcription-dependent, to non-canonical and localized to axonal growth cones. Here, we review the variety of Shh functions in the developing nervous system and their consequences for neurodevelopmental diseases and neural regeneration, with particular emphasis on the signaling mechanisms underlying Shh action.