During development, sonic hedgehog functions as a morphogen in both a short-range contact-dependent and in a long-range diffusable mode. Here, we show using a panel of sonic hedgehog variants that regions near the N terminus of the protein play a critical role in modulating these functions. In the hedgehog responsive cell line C3H10T1/2, we discovered that not only were some N-terminally truncated variants inactive at eliciting a hedgehog-dependent response, but they competed with the wild-type protein for function and therefore served as functional antagonists. These variants were indistinguishable from wild-type sonic hedgehog in their ability to bind the receptor patched-1, but failed to induce the hedgehog-responsive markers, Gli-1 and Ptc-1, and failed to promote hedgehog-dependent differentiation of the cell line. They also failed to support the adhesion of C3H10T1/2 cells to hedgehog-coated plates under conditions where wild-type sonic hedgehog supported binding. Structure-activity data indicated that the N-terminal cysteine plays a key regulatory role in modulating hedgehog activity. The ability to dissect patched-1 binding from signaling events in C3H10T1/2 cells suggests the presence of unidentified factors that contribute to hedgehog responses.