Nevoid basal cell carcinoma syndrome (NBCCS) is an autosomal dominant or spontaneous disorder characterized by multiple cutaneous basal cell carcinomas, odontogenic keratocysts, skeletal anomalies and facial dysmorphology, including cleft lip and palate. Causative mutations for NBCCS occur in the PTCH1 gene on chromosome 9q22.3–q31, which encodes the principle receptor for the Hedgehog signalling pathway. We have investigated the molecular basis of craniofacial defects seen in NBCCS using a transgenic mouse model expressing Shh in basal epithelium under a Keratin-14 promoter. These mice have an absence of flat bones within the skull vault, hypertelorism, open-bite malocclusion, cleft palate and arrested tooth development. Significantly, increased Hedgehog signal transduction in these mice can influence cell fate within the craniofacial region. In medial edge epithelium of the palate, Shh activity prevents apoptosis and subsequent palatal shelf fusion. In contrast, high levels of Shh in odontogenic epithelium arrests tooth development at the bud stage, secondary to a lack of cell proliferation in this region. These findings illustrate the importance of appropriately regulated Hedgehog signalling during early craniofacial development and demonstrate that oro-facial clefting and hypodontia seen in NBCCS can occur as a direct consequence of increased Shh signal activity within embryonic epithelial tissues.