Hedgehog signaling is required for formation and patterning of the anterior pituitary gland. However, the role of Hedgehog in pituitary precursor cell specification and subsequent placode formation is not well understood. We analyzed pituitary precursor cell lineages and find that pitx3 and distal-less3b (dlx3b) expression domains define lens and pituitary precursor positions. We show that pitx3 is required for pituitary pre-placode formation and cell specification, whereas dlx3b and dlx4b are required to restrict pituitary placode size. In smoothened mutant embryos that cannot transduce Hedgehog signals, median pituitary precursors are mis-specified and form an ectopic lens. Moreover, overexpression of sonic hedgehog (shh) blocks lens formation, and derivatives of lens precursors express genes characteristic of pituitary cells. However, overexpression of shh does not increase median pituitary placode size nor does it upregulate patched (ptc) expression in pituitary precursors during early somitogenesis. Our study suggests that by the end of gastrulation, pitx3-expressing cells constitute an equivalence domain of cells that can form either pituitary or lens, and that a non-Hedgehog signal initially specifies this placodal field. During mid-somitogenesis, Hedgehog then acts on the established median placode as a necessary and sufficient signal to specify pituitary cell types.