Summary We present evidence for a coupled two-step action of Hedgehog signaling in patterning axon targeting of Drosophila olfactory receptor neurons (ORNs). In the first step, differential Hedgehog pathway activity in peripheral sensory organ precursors creates ORN populations with different levels of the Patched receptor. Different Patched levels in ORNs then determine axonal responsiveness to target-derived Hedgehog in the brain: only ORN axons that do not express high levels of Patched are responsive to and require a second step of Hedgehog signaling for target selection. Hedgehog signaling in the imaginal sensory organ precursors thus confers differential ORN responsiveness to Hedgehog-mediated axon targeting in the brain. This mechanism contributes to the spatial coordination of ORN cell bodies in the periphery and their glomerular targets in the brain. Such coupled two-step signaling may be more generally used to coordinate other spatially and temporally segregated developmental events.