Ballooned hepatocytes distinguish non-alcoholic steatohepatitis (NASH) from steatosis. Such cells contain dilated endoplasmic reticulum and ubiquitin aggregates, characteristics of endoplasmic reticulum stress. Hepatocyte ballooning increases the risk for fibrosis in NASH, suggesting that ballooned hepatocytes release pro-fibrogenic factors. Hedgehog ligands function as pro-fibrogenic factors in liver diseases, but mechanisms for hedgehog ligand production remain poorly understood. We evaluated the hypothesis that endoplasmic reticulum stress induces hepatocyte production of hedgehog ligands that provide paracrine pro-fibrogenic signals to neighbouring cells. In livers from NASH patients, keratin 8/18 and ubiquitin staining demonstrated enlarged, keratin 8/18-negative/ubiquitin-positive hepatocytes (ballooned hepatocytes) that were positive for Sonic hedgehog. In order to model endoplasmic reticulum stress in vitro, primary mouse hepatocytes were treated with tunicamycin. Compared to vehicle, tunicamycin significantly increased Sonic hedgehog and Indian hedgehog expression. Furthermore, conditioned medium from tunicamycin-treated hepatocytes increased Gli-luciferase reporter activity 14-fold more than conditioned medium from vehicle-treated hepatocytes. Cyclopamine (hedgehog signalling inhibitor) abrogated the effect of conditioned medium from tunicamycin-treated hepatocytes, verifying that soluble hepatocyte-derived factors activate hedgehog signalling. Ballooned hepatocytes in NASH patients did not express the hedgehog target gene, Gli2, α-smooth muscle actin or vimentin, but were surrounded by Gli2-positive stromal cells expressing these myofibroblast markers. Trichrome staining demonstrated the accumulation of ballooned hepatocytes in areas of matrix deposition, and numbers of Sonic hedgehog-positive hepatocytes correlated with the degree of ballooning and fibrosis stage. Hepatocytes undergoing endoplasmic reticiulum stress generate hedgehog ligands which act as paracrine pro-fibrogenic factors for hedgehog-responsive stromal cells. These results help to explain why fibrosis stage correlates with hepatocyte ballooning in NASH. Copyright © 2011 Pathological Society of Great Britain and Ireland. Published by John Wiley & Sons, Ltd.