Hedgehog proteins mediate many of the inductive interactions that determine cell fate during embryonic development. Hedgehog signaling has been shown to regulate slow muscle fiber type development. We report here that mutations in the zebrafish slow-muscle-omitted (smu) gene disrupt many developmental processes involving Hedgehog signaling. smu(-/-) embryos have a 99% reduction in the number of slow muscle fibers and a complete loss of Engrailed-expressing muscle pioneers. In addition, mutant embryos have partial cyclopia, and defects in jaw cartilage, circulation and fin growth. The smu(-/-) phenotype is phenocopied by treatment of wild-type embryos with forskolin, which inhibits the response of cells to Hedgehog signaling by indirect activation of cAMP-dependent protein kinase (PKA). Overexpression of Sonic hedgehog (Shh) or dominant negative PKA (dnPKA) in wild-type embryos causes all somitic cells to develop into slow muscle fibers. Overexpression of Shh does not rescue slow muscle fiber development in smu(-/-) embryos, whereas overexpression of dnPKA does. Cell transplantation experiments confirm that smu function is required cell-autonomously within the muscle precursors: wild-type muscle cells rescue slow muscle fiber development in smu(-/-) embryos, whereas mutant muscle cells cannot develop into slow muscle fibers in wild-type embryos. Slow muscle fiber development in smu mutant embryos is also rescued by expression of rat Smoothened. Therefore, Hedgehog signaling through Slow-muscle-omitted is necessary for slow muscle fiber type development. We propose that smu encodes a vital component in the Hedgehog response pathway.