Cerebrolysin, a mixture of neurotrophic peptides, enhances neurogenesis in experimental neurodegenerative diseases and stroke. Sonic hedgehog (Shh) signaling pathway stimulates neurogenesis after stroke. In the present study, we tested the hypothesis that the Shh signaling pathway mediates Cerebrolysin enhanced neurogenesis and functional recovery after stroke. Rats were subjected to embolic middle cerebral artery occlusion (MCAo). To examine whether blockage of the Shh signaling pathway abolishes the Cerebrolysin induced neurogenesis and functional recovery, Cyclopamine (0.2mg/kg), a Shh receptor inhbitor, or vehicle (45% 2-hydroxypropyl-cyclodextrin) was intraventricularly infused using an osmotic pump for 28 days starting 24h after MCAo with or without intraperitoneally (IP) administration of Cerebrolysin (2.5ml/kg, daily for 28d). For mitotic labeling, Bromodeoxyuridine (BrdU, 100mg/kg, IP) was administered daily for 7 days starting 24h after MCAo. Neurological functional tests including, adhesive removal test, foot-fault test, and modified neurological severity score (mNSS) were performed weekly for 5 weeks after stroke. Treatment with Cerebrolysin significantly (p<0.05) increased the number of BrdU positive cells (148±24/mm
2
vs 90±9/mm
2
in the vehicle group, n=10/group) in the ipsilateral subventricular zone (SVZ), which was associated with significant improvement of functional recovery from week 3 thought week 5 after MCAo compared with vehicle treated rats. However, inhibition of the Shh pathway with Cyclopamine significantly reduced BrdU positive cells (51±10/mm
2
) in the SVZ, and cyclopamine treated animals failed to improve neurological function compared with vehicle treated rats. Furthermore, Cyclopamine completely reversed the effects of Cerebrolysin on SVZ cell proliferation (90±10/mm
2
) and functional recovery. These results demonstrate that the Shh pathway mediates Cerebrolysin-enhanced neural progenitor proliferation and improves functional recovery in rats after stroke.