Despite its evolutionary conservation and functional importance, little is known of the signaling pathways that underlie development of the hypothalamus. Although mutations affecting Nodal and Hedgehog signaling disrupt hypothalamic development, the time and site of action and the exact roles of these pathways remain very poorly understood. Unexpectedly, we show here that cell-autonomous reception of Nodal signals is neither required for the migration of hypothalamic precursors within the neural plate, nor for further development of the anterior-dorsal hypothalamus. Nodal signaling is, however, cell-autonomously required for establishment of the posterior-ventral hypothalamus. Conversely, Hedgehog signaling antagonizes the development of posterior-ventral hypothalamus, while promoting anterior-dorsal hypothalamic fates. Besides their distinct roles in the regionalization of the diencephalon, we reveal cooperation between Nodal and Hedgehog pathways in the maintenance of the anterior-dorsal hypothalamus. Finally we show that it is the prechordal plate and not the head endoderm that provides the early signals essential for establishment of the hypothalamus.