Embryos deficient in the morphogen Sonic hedgehog (Shh) or the endocytic receptor megalin exhibit common neurodevelopmental abnormalities. Therefore, we have investigated the possibility that a functional relationship exists between the two proteins. During embryonic development, megalin was found to be expressed along the apical surfaces of neuroepithelial cells and was coexpressed with Shh in the ventral floor plate of the neural tube. Using enzyme-linked immunosorbent assay, homologous ligand displacement, and surface plasmon resonance techniques, it was found that the amino-terminal fragment of Shh (N-Shh) bound to megalin with high affinity. Megalin-expressing cells internalized N-Shh through a mechanism that was inhibited by antagonists of megalin, viz. anti-receptor-associated protein and anti-megalin antibodies. Heparin also inhibited N-Shh endocytosis, implicating proteoglycans in the internalization process, as has been described for other megalin ligands. Use of chloroquine to inhibit lysosomal proteinase activity showed that N-Shh endocytosed via megalin was not efficiently targeted to the lysosomes for degradation. The ability of megalin-internalized N-Shh to bypass lysosomes may relate to the finding that the interaction between N-Shh and megalin was resistant to dissociation with low pH. Together, these findings show that megalin is an efficient endocytic receptor for N-Shh. Furthermore, they implicate megalin as a new regulatory component of the Shh signaling pathway.