Hypothalamic melanin-concentrating hormone (MCH) neurons are important regulators of multiple physiological processes, such as sleep, feeding, and memory. Despite the increasing interest in their neuronal functions, the molecular mechanism underlying MCH neuron development remains poorly understood. We report that a three-dimensional culture of mouse embryonic stem cells (mESCs) can generate hypothalamic-like tissues containing MCH-positive neurons, which reproduce morphologic maturation, neuronal connectivity, and neuropeptide/neurotransmitter phenotype of native MCH neurons. Using this
in vitro
system, we demonstrate that Hedgehog (Hh) signaling serves to produce major neurochemical subtypes of MCH neurons characterized by the presence or absence of cocaine- and amphetamine-regulated transcript (CART). Without exogenous Hh signals, mESCs initially differentiated into dorsal hypothalamic/prethalamic progenitors and finally into MCH
+
CART
+
neurons through a specific intermediate progenitor state. Conversely, activation of the Hh pathway specified ventral hypothalamic progenitors that generate both MCH
+
CART
−
and MCH
+
CART
+
neurons. These results suggest that
in vivo
MCH neurons may originate from multiple cell lineages that arise through early dorsoventral patterning of the hypothalamus. Additionally, we found that Hh signaling supports the differentiation of mESCs into orexin/hypocretin neurons, a well-defined cell group intermingled with MCH neurons in the lateral hypothalamic area (LHA). The present study highlights and improves the utility of mESC culture in the analysis of the developmental programs of specific hypothalamic cell types.