Hedgehog proteins modulate development and patterning of the embryonic nervous system. As expression of desert hedgehog and the hedgehog receptor, patched-1, persist in the postnatal and adult peripheral nerves, the hedgehog pathway may have a role in maturation and maintenance of the peripheral nervous system in normal and disease states. We measured desert hedgehog expression in the peripheral nerve of maturing diabetic rats and found that diabetes caused a significant reduction in desert hedgehog mRNA. Treating diabetic rats with a sonic hedgehog-IgG fusion protein fully restored motor- and sensory-nerve conduction velocities and maintained the axonal caliber of large myelinated fibers. Diabetes-induced deficits in retrograde transport of nerve growth factor and sciatic-nerve levels of calcitonin gene-related product and neuropeptide Y were also ameliorated by treatment with the sonic hedgehog-IgG fusion protein, as was thermal hypoalgesia in the paw. These studies implicate disruption of normal hedgehog function in the etiology of diabetes-induced peripheral-nerve dysfunction and indicate that delivery of exogenous hedgehog proteins may have therapeutic potential for the treatment of diabetic neuropathy.