Holoprosencephaly (HPE), the most common forebrain malformation, is characterized by an incomplete separation of the cerebral hemispheres. Mutations in the homeobox gene SIX3 account for 1.3% of all cases of human HPE. Using zebrafish-based assays, we have now determined that HPE-associated Six3 mutant proteins function as hypomorphs. Haploinsufficiency of Six3 caused by deletion of one allele of Six3 or by replacement of wild-type Six3 with HPE-associated Six3 mutant alleles was sufficient to recapitulate in mouse models most of the phenotypic features of human HPE. We demonstrate that Shh is a direct target of Six3 in the rostral diencephalon ventral midline (RDVM). Reduced amounts of functional Six3 protein fail to activate Shh expression in the mutant RDVM and ultimately lead to HPE. These results identify Six3 as a direct regulator of Shh expression and reveal a crossregulatory loop between Shh and Six3 in the ventral forebrain.