Branching morphogenesis is thought to be governed by epithelial-stromal interactions, but the mechanisms underlying specification of branch location remain largely unknown. Prompted by the striking absence of Hedgehog (Hh) response at the sites of nascent buds in regenerating tubules of the adult prostate, we investigated the role of Hh signalling in adult prostate branching morphogenesis. We find that pathway activity is localized to stromal cells, and that its attenuation by genetic or pharmacologic manipulation leads to increased branching. Decreased pathway activity correlates with increased stromal production of hepatocyte growth factor (Hgf), and we show that Hgf induces epithelial tubule branching. Regulation of Hgf expression by Hh signalling is indirect, mediated by Hh-induced expression of the microRNAs miR-26a and miR-26b, which in turn downregulate expression of Hgf. Prostate tubule branching thus may be initiated from regions of low Hh pathway activity, with implications for the prostatic hyperplasia commonly observed in late adulthood.