We show that desert hedgehog (dhh), a signaling molecule expressed by Schwann cells, is essential for the structural and functional integrity of the peripheral nerve. Dhh-null nerves display multiple abnormalities that affect myelinating and nonmyelinating Schwann cells, axons, and vasculature and immune cells. Myelinated fibers of these mice have a significantly increased (more than two times) number of Schmidt-Lanterman incisures (SLIs), and connexin 29, a molecular component of SLIs, is strongly upregulated. Crossing Dhh-null mice with myelin basic protein (MBP)-deficient shiverer mice, which also have increased SLI numbers, results in further increased SLIs, suggesting that Dhh and MBP control SLIs by different mechanisms. Unmyelinated fibers are also affected, containing many fewer axons per Schwann cell in transverse profiles, whereas the total number of unmyelinated axons is reduced by approximately one-third. In Dhh-null mice, the blood-nerve barrier is permeable and neutrophils and macrophage numbers are elevated, even in uninjured nerves. Dhh-null nerves also lack the largest-diameter myelinated fibers, have elevated numbers of degenerating myelinated axons, and contain regenerating fibers. Transected dhh nerves degenerate faster than wild-type controls. This demonstrates that a single identified glial signal, Dhh, plays a critical role in controlling the integrity of peripheral nervous tissue, in line with its critical role in nerve sheath development (Parmantier et al., 1999). The complexity of the defects raises a number of important questions about the Dhh-dependent cell-cell signaling network in peripheral nerves.