Hedgehog (Hh) proteins function in cell/cell signaling processes linked to human embryo development and the progression of several types of cancer. Here we describe an optical assay of hedgehog cholesterolysis, a unique autoprocessing event critical for Hh function. The assay uses a recombinant FRET-active hedgehog precursor whose cholesterolysis can be monitored continuously in multi-well plates (dynamic range, 4; Z’, 0.7), offering advantages in throughput over conventional SDS-PAGE assays. Application of the optical assay in a pilot small molecule screen produced a novel cholesterolysis inhibitor (apparent IC50, 5×10−6 M) that appears to inactivate hedgehog covalently by a SNAr mechanism.