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Holoprosencephaly (HPE) is the most common developmental anomaly of the human forebrain, and in its severe form, the cerebral hemispheres fail to completely separate into two distinct halves. Although disruption of ventral forebrain induction is thought to underlie most HPE cases, a subset of HPE patients exhibits preferential dysgenesis of forebrain dorsal midline structures with unknown etiology. In this study, we show that Sonic hedgehog (Shh) lacking cholesterol moiety in one allele (ShhN/+) in mice can elicit ectopic Shh signaling in early telencephalon to induce ventral progenitor marker expression in the cortical region and impair telencephalic dorsal midline development. Prolonged ectopic ShhN signaling impaired Bmp and Wnt signaling from the dorsal patterning center through upregulation of Fgf8, leading to augmented cell proliferation, decreased cell death and impaired roof plate morphogenesis. Accordingly, ShhN/+ mutant telencephalic dorsal midline structures, including cortical hem, hippocampus and choroid plexus, either failed to form or were hypoplastic. Strikingly, ShhN/+ mutants displayed a spectrum of phenotypic features such as failure of anterior cerebral hemisphere to divide, hydrocephalus and cleft palate which have been observed in a human patient with milder HPE predicted to produce SHHN protein due to a truncation mutation in one SHH allele. We propose that elevated ectopic Shh signaling can impair dorsal telencephalic midline morphogenesis, and lead to non-cleavage of midline structures mimicking human HPE with dorsal midline defects.