In the developing neural tube of vertebrate embryos, many types of neuronal and nonneuronal cells differentiate in response to the secreted signalling molecule, Shh. Shh shows a spatially restricted pattern of expression in cells located at the ventral midline, yet governs the differentiation of diverse cell types throughout the ventral half of the neural tube. Here, we describe how the distinct fate assumed by cells in response to Shh is dependent upon their position with respect to both the dorso-ventral and anterior-posterior axes of the neural tube and describe the ways in which a single factor, Shh, is able to pattern the developing nervous system. We first discuss the evidence that Shh does impose ventral identity on cells in the neural tube, then focus on the role of a graded Shh signal in patterning the neural tube and finally discuss the interaction of Shh with other factors that affect its signalling outcome.