Sonic hedgehog (Shh) is a multifunctional signaling protein governing pattern formation, proliferation and cell survival during embryogenesis. In the adult brain, Shh has neurotrophic function and is implicated in hippocampal neurogenesis but the cellular source of Shh in the hippocampus remains ill defined. Here, we utilize a gene expression tracer allele of Shh (Shh-nlacZ) which allowed the identification of a subpopulation of hilar neurons known as mossy cells (MCs) as a prominent and dynamic source of Shh within the dentate gyrus. AAV-Cre mediated ablation of Shh in the adult dentate gyrus led to a marked degeneration of MCs. Conversely, chemical stimulation of hippocampal neurons using the epileptogenic agent kainic acid (KA) increased the number of Shh+ MCs indicating that the expression of Shh by MCs confers a survival advantage during the response to excitotoxic insults. In addition, ablation of Shh in the adult dentate gyrus led to increased neural precursor cell proliferation and their migration into the subgranular cell layer demonstrating that MCs-generated Shh is a key modulator of hippocampal neurogenesis.