The forkhead transcription factor FOXE1 is mutated in patients with Bamforth-Lazarus syndrome that exhibit hair follicle defects, suggesting a possible role for Foxe1 in hair follicle morphogenesis. Here, we report that Foxe1 is specifically expressed in the lower undifferentiated compartment of the hair follicle, at a time and site that parallel activation of the Shh signaling pathway. The Foxe1 protein is also expressed in human and mouse basal cell carcinoma in which hedgehog signaling is constitutively activated, whereas it is undetectable in normal epidermis and squamous cell carcinoma. Moreover, expression of a dominant-negative form of Gli2 in skin results in complete suppression of Foxe1 expression in the hair follicle, whereas transcriptionally active Gli2 stimulates activity of the Foxe1 promoter. Foxe1-null skin displays aberrant hair formation with the production of thinner and curly pelage hairs. Although the hair follicle internal structure is conserved and several lineage markers are properly expressed, the orderly downgrowth of follicles is strikingly disrupted, causing disorientation, misalignment and aberrantly shaped of hair follicles. Our findings provide a strong indication that the defect in Bamforth-Lazarus syndrome is due to altered FOXE1 function in the hair follicle, and is independent of systemic defects present in affected individuals. In addition, we establish Foxe1 as a downstream target of the Shh/Gli pathway in hair follicle morphogenesis, and as a crucial player for correct hair follicle orientation into the dermis and subcutis.