In ventromedial cells of the developing CNS, Sonic hedgehog (Shh) has been shown to affect precursor proliferation, phenotype determination, and survival. Here we show that Shh and its receptor, Ptc-1, are expressed in the adult rat basal forebrain, and that Ptc-1 is expressed specifically by cholinergic neurons. In basal forebrain cultures, Shh was added alone and in combination with nerve growth factor (NGF), and the number of cholinergic neurons was determined by choline acetyltransferase (ChAT) immunocytochemistry. By 8 days in vitro, Shh and NGF show a synergistic effect: the number of ChAT-positive cells after treatment with both factors is increased over untreated cultures or cultures treated with either factor alone. While Shh increases the overall basal level of proliferation, double-labeling of dividing neuronal precursors with [(3)H]thymidine followed by ChAT immunocytochemistry after they mature, demonstrates that the specific increase in cholinergic neurons is not due to this proliferation enhancement. These experiments imply a role for Shh in the development of postmitotic cholinergic neurons and suggest a therapeutic value for Shh in neurodegenerative disease.