Despite the well-characterised role of sonic hedgehog (Shh) in promoting interfollicular basal cell proliferation and hair follicle downgrowth, the role of hedgehog signalling during epidermal stem cell fate remains largely uncharacterised. In order to determine whether the three vertebrate hedgehog molecules play a role in regulating epidermal renewal we overexpressed sonic (Shh), desert (Dhh) and Indian (Ihh) hedgehog in the basal cells of mouse skin under the control of the human keratin 14 promoter. We observed no overt epidermal morphogenesis phenotype in response to Ihh overexpression, however Dhh overexpression resulted in a range of embryonic and adult skin manifestations indistinguishable from Shh overexpression. Two distinct novel phenotypes were observed amongst Shh and Dhh transgenics, one exhibiting epidermal progenitor cell hyperplasia with the other displaying a complete loss of epidermal tissue renewal indicating deregulation of stem cell activity. These data suggest that correct temporal regulation of hedgehog activity is a key factor in ensuring epidermal stem cell maintenance. In addition, we observed Shh and Dhh transgenic skin from both phenotypes developed lesions reminiscent of human basal cell carcinoma (BCC), indicating that BCCs can be generated despite the loss of much of the proliferative (basal) compartment. These data suggest the intriguing possibility that BCC can arise outside the stem cell population. Thus the elucidation of Shh (and Dhh) target gene activation in the skin will likely identify those genes responsible for increasing the proliferative potential of epidermal basal cells and the mechanisms involved in regulating epidermal stem cell fate.