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BACKGROUND: The pro-inflammatory cytokine interferon gamma (IFNγ), a key player in various neurological diseases, was recently shown to induce a dysregulated phenotype in neural stem/precursor cells (NSPCs) that is characterized by the simultaneous expression of glial and neuronal markers and irregular electrophysiological properties. Thus far, the mechanisms of this phenomenon have remained unclear. METHODOLOGY/PRINCIPAL FINDINGS: To determine if binding of the signal transducers and activators of transcription (Stat 1) to the sonic hedgehog (SHH) promoter is important for this phenomenon to occur, chromatin immunoprecipitation and pharmacological inhibition studies were performed. We report here that the activation of both the Stat 1 and SHH pathways is necessary to elicit the dysregulated phenotype. CONCLUSIONS/SIGNIFICANCE: Thus, blocking these pathways might preserve functional differentiation of NSPCs under inflammatory conditions leading to more effective regeneration.