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Abstract Background Chinese indigenous sheep are valuable resources with unique features and characteristics. They are distributed across regions with different climates in mainland China; however, few reports have analyzed the environmental adaptability of sheep based on their genome. We examined the variants and signatures of selection involved in adaptation to extreme humidity, altitude, and temperature conditions in 173 sheep genomes from 41 phenotypically and geographically representative Chinese indigenous sheep breeds to characterize the genetic basis underlying environmental adaptation in these populations. Results Based on the analysis of population structure, we inferred that Chinese indigenous sheep are divided into four groups: Kazakh (KAZ), Mongolian (MON), Tibetan (TIB), and Yunnan (YUN). We also detected a set of candidate genes that are relevant to adaptation to extreme environmental conditions, such as drought-prone regions (TBXT, TG, and HOXA1), high-altitude regions (DYSF, EPAS1, JAZF1, PDGFD, and NF1) and warm-temperature regions (TSHR, ABCD4, and TEX11). Among all these candidate genes, eight ABCD4, CNTN4, DOCK10, LOC105608545, LOC121816479, SEM3A, SVIL, and TSHR overlap between extreme environmental conditions. The TSHR gene shows a strong signature for positive selection in the warm-temperature group and harbors a single nucleotide polymorphism (SNP) missense mutation located between positions 90,600,001 and 90,650,001 on chromosome 7, which leads to a change in the protein structure of TSHR and influences its stability. Conclusions Analysis of the signatures of selection uncovered genes that are likely related to environmental adaptation and a SNP missense mutation in the TSHR gene that affects the protein structure and stability. It also provides information on the evolution of the phylogeographic structure of Chinese indigenous sheep populations. These results provide important genetic resources for future breeding studies and new perspectives on how animals can adapt to climate change.