Progenitors regenerate fatty livers but the mechanisms involved are uncertain. The Hedgehog pathway regulates mesendodermal progenitors and modulates mesenchymal-epithelial interactions during tissue remodeling. To determine if Hedgehog signaling increases in liver progenitors during fatty liver injury, we compared expression of Hedgehog ligands and target genes across a spectrum of injury. Leptin-deficient ob/ob mice with fatty livers and their healthy lean littermates were studied before and after exposure to the hepatotoxin, ethionine. At baseline, ob/ob mice had greater liver damage than controls. Ethionine induced liver injury in both ob/ob and lean mice, with greater injury occurring in ob/ob mice. After ethionine, the ob/ob mice developed liver atrophy and fibrosis. Liver injury increased hepatic accumulation of progenitors, including ductular cells that produced and responded to Hedgehog ligands. A dose-response relationship was demonstrated between liver injury and expansion of Hedgehog-responsive progenitors. In severely damaged, atrophic livers, nuclei in mature-appearing hepatocytes accumulated the Hedgehog-regulated mesenchymal transcription factor, Gli2 and lost expression of the liver epithelial transcription factor, hepatocyte nuclear factor 6 (HNF-6). Hepatic levels of collagen mRNA and pericellular collagen fibrils increased concomitantly. Hence, fatty liver injury increases Hedgehog activity in liver progenitors, and this might promote epithelial-mesenchymal transitions that result in liver fibrosis.