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Shh signaling induces proliferation of many cell types during development and disease, but how Gli transcription factors regulate these mitogenic responses remains unclear. By genetically altering levels of Gli activator and repressor functions in mice, we have demonstrated that both Gli functions are involved in the transcriptional control of N-myc and Cyclin D2 during embryonic hair follicle development. Our results also indicate that additional Gli-activator-dependent functions are required for robust mitogenic responses in regions of high Shh signaling. Through posttranscriptional mechanisms, including inhibition of GSK3-β activity, Shh signaling leads to spatially restricted accumulation of N-myc and coordinated cell cycle progression. Furthermore, a temporal shift in the regulation of GSK3-β activity occurs during embryonic hair follicle development, resulting in a synergy with β-catenin signaling to promote …