Fate determination in the mammalian forebrain, where mature phenotypes are often not achieved until postnatal stages of development, has been an elusive topic of study despite its relevance to neuropsychiatric disease. In the ventral telencephalon, major subgroups of cerebral cortical interneurons originate in the medial ganglionic eminence (MGE), where the signaling molecule sonic hedgehog (Shh) continues to be expressed during the period of neuronogenesis. To examine whether Shh regulates cortical interneuron specification, we studied mice harboring conditional mutations in Shh within the neural tube. At embryonic day 12.5, NestinCre:Shh(Fl/Fl) mutants have a relatively normal index of S-phase cells in the MGE, but many of these cells do not co-express the interneuron fate-determining gene Nkx2.1. This effect is reproduced by inhibiting Shh signaling in slice cultures, and the effect can be rescued in NestinCre:Shh(Fl/Fl) slices by the addition of exogenous Shh. By culturing MGE progenitors on a cortical feeder layer, cell fate analyses suggest that Shh signaling maintains Nkx2.1 expression and cortical interneuron fate determination by MGE progenitors. These results are corroborated by the examination of NestinCre:Shh(Fl/Fl) cortex at postnatal day 12, in which there is a dramatic reduction in cell profiles that express somatostatin or parvalbumin. By contrast, analyses of Dlx5/6Cre:Smoothened(Fl/Fl) mutant mice suggest that cell-autonomous hedgehog signaling is not crucial to the migration or differentiation of most cortical interneurons. These results combine in vitro and ex vivo analyses to link embryonic abnormalities in Shh signaling to postnatal alterations in cortical interneuron composition.