The Hedgehog signaling pathway is involved in both development and cancer induction in a wide range of organisms. The end point of the Hedgehog signal-transduction cascade is the Gli/Ci, zinc-finger transcription factors. Proteins such as Fused, Suppressor of fused (SUFU), Costal-2, and protein kinase A are essential for regulation of Gli/Ci processing, activity, and localization. Coimmunoprecipitation and Far Western assays, coupled with truncation analysis and mutagenesis have been used to define the region of interaction between Gli proteins and SUFU. We identify a novel motif SYGH in Gli/Ci family proteins, which is required for the interaction with SUFU. Mutational studies revealed that Gly(122) and His(123) are crucial for binding to SUFU, suggesting the importance of hydrophobicity for the correct binding conformation. Functional analysis revealed that the activity of GLI transcription factors with mutations in this motif is no longer suppressed by co-expression of SUFU. Moreover, we have found that a C-terminal 19-amino acid deletion in SUFU (delta465) is sufficient to abrogate interaction with GLI1. Interestingly, this SUFU mutant localizes in the nucleus, most probably because it is not efficiently sequestered in the cytoplasm. Taken together, we identified a novel motif in the Gli/Ci family of proteins that is essential both for protein-protein interaction with SUFU and for functional repression of GLI1 by SUFU.