Hematopoietic stem cells must be capable of both self-renewal and production of progenitor cells that give rise to all of the blood cell types, the two basic principles of stem cell biology. These unique stem cell properties have generated vast interest, due to the potential of stem cell therapies to treat various types of blood diseases. In this study, fly genetics were used to identify factors that act with the GATA:Friend Of GATA (GATA:FOG) complex to maintain hematopoietic progenitor cells. The Hedgehog signaling factor, Smoothened, was identified as one of those factors. We have determined that canonical Hedgehog signaling regulates U-shaped, the Drosophila homologue of FOG, to maintain hematopoietic progenitors. Furthermore, we propose a model in which we outline how Hedgehog signaling maintains FOG and hematopoietic progenitors. Our results may identify conserved regulatory mechanisms whereby signals from the microenvironment control progenitor differentiation.