Hedgehog (Hh) signaling is frequently up-regulated in fibrogenic pancreatic diseases including chronic pancreatitis and pancreatic cancer. Although recent series suggest exclusive paracrine activation of stromal cells by Hh ligands from epithelial components, debates still exist on how Hh signaling works in pathologic conditions. To explore how Hh signaling affects the pancreas, we investigated transgenic phenotypes in zebrafish that over-express either Indian Hh or Sonic Hh along with green fluorescence protein (GFP) to enable real-time observation, or GFP alone as control, at the ptf1a domain. Transgenic embryos and zebrafish were serially followed for transgenic phenotypes, and investigated using quantitative reverse transcription-polymerase chain reaction (qRT-PCR), in situ hybridization, and immunohistochemistry. Over-expression of Ihh or Shh reveals virtually identical phenotypes. Hh induces morphologic changes in a developing pancreas without derangement in acinar differentiation. In older zebrafish, Hh induces progressive pancreatic fibrosis intermingled with proliferating ductular structures, which is accompanied by the destruction of the acinar structures. Both myofibroblasts and ductular are activated and proliferated by paracrine Hh signaling, showing restricted expression of Hh downstream components including Patched1 (Ptc1), Smoothened (Smo), and Gli1/2 in those Hh-responsive cells. Hh ligands induce matrix metalloproteinases (MMPs), especially MMP9 in all Hh-responsive cells, and transform growth factor-ß1 (TGFß1) only in ductular cells. Aberrant Hh over-expression, however, does not induce pancreatic tumors. On treatment with inhibitors, embryonic phenotypes are reversed by either cyclopamine or Hedgehog Primary Inhibitor-4 (HPI-4). Pancreatic fibrosis is only prevented by HPI-4. Our study provides strong evidence of Hh signaling which induces pancreatic fibrosis through paracrine activation of Hh-responsive cells in vivo. Induction of MMPs and TGFß1 by Hh signaling expands on the current understanding of how Hh signaling affects fibrosis and tumorigenesis. These transgenic models will be a valuable platform in exploring the mechanism of fibrogenic pancreatic diseases which are induced by Hh signaling activation.