The teleost Astyanax mexicanus consists of surface dwelling (surface fish) and cave dwelling (cavefish) forms. Cavefish have evolved in subterranean habitats characterized by reduced oxygen levels (hypoxia) and exhibit a subset of phenotypic traits controlled by increased Sonic hedgehog (Shh) signaling along the embryonic midline. The enhancement of primitive hematopoietic domains, which are formed bilaterally in the anterior and posterior lateral plate mesoderm, are responsible for the development of more larval erythrocytes in cavefish relative to surface fish. In this study, we determine the role of hypoxia and Shh signaling in the development and evolution of primitive hematopoiesis in cavefish. We show that hypoxia treatment during embryogenesis increases primitive hematopoiesis and erythrocyte development in surface fish. We also demonstrate that upregulation of Shh midline signaling by the Smoothened agonist SAG increases primitive hematopoiesis and erythrocyte development in surface fish, whereas Shh downregulation via treatment with the Smoothened inhibitor cyclopamine decreases these traits in cavefish. Together these results suggest that hematopoietic enhancement is regulated by hypoxia and Shh signaling. Lastly, we demonstrate that hypoxia enhances expression of Shh signaling along the midline of surface fish embryos. We conclude that hypoxia-mediated Shh plasticity may be a driving force for the adaptive evolution of primitive hematopoiesis and erythrocyte development in cavefish.