To ensure the formation of a properly patterned embryo, multiple processes must operate harmoniously at sequential phases of development. This is implemented by mutual interactions between cells and tissues that together regulate the segregation and specification of cells, their growth and morphogenesis. The formation of the spinal cord and paraxial mesoderm derivatives exquisitely illustrate these processes. Following early gastrulation, while the vertebrate body elongates, a population of bipotent neuromesodermal progenitors resident in the posterior region of the embryo generate both neural and mesodermal lineages. At later stages, the somitic mesoderm regulates aspects of neural patterning and differentiation of both central and peripheral neural progenitors. Reciprocally, neural precursors influence the paraxial mesoderm to regulate somite-derived myogenesis and additional processes by distinct mechanisms. Central to this crosstalk is the activity of the axial notochord, which, via sonic hedgehog signaling, plays pivotal roles in neural, skeletal muscle and cartilage ontogeny. Here, we discuss the cellular and molecular basis underlying this complex developmental plan, with a focus on the logic of sonic hedgehog activities in the coordination of the neural-mesodermal axis.