Stem cells reside in specialised microenvironments, or niches, which often contain support cells that control stem cell maintenance and proliferation. Hedgehog (Hh) proteins mediate homeostasis in several adult niches, but a detailed understanding of Hh signalling in stem cell regulation is lacking. Studying the Drosophila female germline stem cell (GSC) niche, we show that Hh acts as a critical juxtacrine signal to maintain the normal GSC population of the ovary. Hh production in cap cells, a type of niche support cells, is regulated by the Engrailed transcription factor. Hh is then secreted to a second, adjacent population of niche cells, the escort cells, where it activates transcription of the GSC essential factors Decapentaplegic (Dpp) and Glass bottom boat (Gbb). In wild-type niches, Hh protein decorates short filopodia that originate in the support cap cells and that are functionally relevant, as they are required to transduce the Hh pathway in the escort cells and to maintain a normal population of GSCs. These filopodia, reminiscent of wing disc cytonemes, grow several fold in length if Hh signalling is impaired within the niche. Because these long cytonemes project directionally towards the signalling-deficient region, cap cells sense and react to the strength of Hh pathway transduction in the niche. Thus, the GSC niche responds to insufficient Hh signalling by increasing the range of Hh spreading. Although the signal(s) perceived by the cap cells and the receptor(s) involved are still unknown, our results emphasise the integration of signals necessary to maintain a functional niche and the plasticity of cellular niches to respond to challenging physiological conditions. The Drosophila ovary contains a well-defined stem cell niche that hosts 2–3 germline stem cells (GSCs). The Hedgehog (Hh) family of signalling proteins mediates cellular homeostasis in several adult tissues, and here we decipher the detailed mechanism of action of Hh in the adult female GSC niche. We demonstrate that Hh acts in a juxtacrine manner (i.e., it requires physical contact between the cells involved) to maintain the normal pool of GSCs in the ovarian niche. Hh is produced in one type of niche support cell (the cap cells), and it is received, upon secretion, by a second, neighbouring population of niche cells (the escort cells). In the latter, we show that the Hh signalling pathway regulates the expression of the Drosophila Bone Morphogenetic Protein (BMP) homologues and essential stem cell factors decapentaplegic (dpp) and glass bottom boat (gbb). We also find that Hh distribution in the GSC niche is mediated by short cellular projections, reminiscent of wing disc cytonemes, although they grow from the (Hh) signal-producing cells towards the receiving cells. Under conditions of low levels of Hh protein and/or Hh signalling within the niche, cap cells emit up to 6-fold longer Hh-decorated cytonemes towards the signalling-deficient area of the niche. Our data reveal that stem cell niches are dynamic structures that can sense, and react to, changes in the activity of essential stem cell factors to prevent stem cell differentiation.