A prevalent developmental mechanism for the assignment of cell identities is the production of spatiotemporal concentration gradients of extracellular signaling molecules that are interpreted by the responding cells. One of such signaling systems is the Shh gradient that controls neuronal subtype identity in the ventral spinal cord. Using loss and gain of function approaches in chick and mouse embryos, we show here that the fibroblast growth factor (FGF) signaling pathway is required to restrict the domains of ventral gene expression as neuroepithelial cells become exposed to Shh during caudal extension of the embryo. FGF signaling activates the expression of the Shh receptor and negative pathway regulator Patched 2 (Ptch2) and therefore can enhance a negative feedback loop that restrains the activity of the pathway. Thus, we identify one of the mechanisms by which FGF signaling acts as a modulator of the onset of Shh signaling activity in the context of coordination of ventral patterning and caudal axis extension. © 2015 Wiley Periodicals, Inc. Develop Neurobiol 76: 956-971, 2016.