Sonic hedgehog (SHH) is a regulator of forebrain development that acts through its receptor, patched 1. However, little is known about cellular mechanisms at neurulation, whereby SHH from the prechordal plate governs specification of the rostral diencephalon ventral midline (RDVM), a major forebrain organizer. We identified LRP2, a member of the LDL receptor gene family, as a component of the SHH signaling machinery in the RDVM. LRP2 acts as an apical SHH-binding protein that sequesters SHH in its target field and controls internalization and cellular trafficking of SHH/patched 1 complexes. Lack of LRP2 in mice and in cephalic explants results in failure to respond to SHH, despite functional expression of patched 1 and smoothened, whereas overexpression of LRP2 variants in cells increases SHH signaling capacity. Our data identify a critical role for LRP2 in SHH signaling and reveal the molecular mechanism underlying forebrain anomalies in mice and patients with Lrp2 defects.