Drosophila limb development is organized by interactions between anterior and posterior compartment cells. Posterior cells continuously express and require engrailed (en) and secrete Hedgehog (Hh) protein. Anterior cells express the zinc-finger protein Cubitus interruptus (Ci). It is now shown that anterior cells lacking ci express hh and adopt posterior properties without expressing en. Increased levels of Ci can induce the expression of the Hh target gene decapentaplegic (dpp) in a Hh-independent manner. Thus, expression of Ci in anterior cells controls limb development (i) by restricting hh secretion to posterior cells and (ii) by conferring competence to respond to Hh by mediating the transduction of this signal.