The diencephalon is the most complex area of the vertebrate brain, being particularly complex in amniotes. It has been suggested that diencephalic regionalization partially depends on local signaling mediated by sonic hedgehog (Shh). However, since the Shh gene is expressed in both the diencephalic basal plate and the zona limitans intrathalamica (ZLI), it is still unclear which of these tissues exerts morphogenetic influence on thalamic regionalization. In the present study using chick and quail embryos, we have found that although Shh from the ZLI and the basal plate induces ectopic expression of diencephalic genes in the posterior prosencephalic alar plate, only Shh originating from the ZLI can induce ectopic gene expression in the anterior alar plate, indicating that the ZLI exerts specific activity in the anterior epithelium. By introducing microbarriers between the diencephalic alar neuroepithelium and either the ZLI or the basal plate, we generated local loss of Shh expression in the ZLI, leading to alterations in molecular regionalization and subsequently, in the nuclear organization of the alar diencephalic derivatives on both sides of the ZLI. We thus demonstrate in vivo that basal signals are required to induce Shh expression in the ZLI and that Shh from the ZLI plays a pivotal role in regionalizing the alar diencephalon. The structural phenotype of Shh abolition in the ZLI consisted of a progressive pattern of alterations in diencephalic organization which were associated with the observed gradient effects in the molecular regionalization of the diencephalon. We conclude that the ZLI is a secondary organizer which exerts its morphogenetic activity through Shh.