In stratified epidermis, activation of the Hh/Gli signal transduction pathway has been implicated in the control of cell proliferation and tumorigenesis. The zinc-finger transcription factor Gli2 has been identified as critical mediator of the Hh signal at the distal end of the pathway, but the molecular mechanisms by which Gli2 regulates cell proliferation or induces epidermal malignancies such as basal cell carcinoma are still unclear. Here, we provide evidence for a role of human GLI2 in antagonizing contact inhibition and epidermal differentiation. We show by gene expression profiling that activation of the GLI2 oncogene in human keratinocytes activates the transcription of a number of genes involved in cell cycle progression such as E2F1, CCND1, CDC2 and CDC45L, while it represses genes associated with epidermal differentiation. Analysis of the proliferative effect of GLI2 revealed that GLI2 is able to induce G1-S phase progression in contact-inhibited keratinocytes. Detailed time-course experiments identified E2F1 as early transcriptional target of GLI2. Further, we show that GLI2 expression in human keratinocytes results in a marked downregulation of epidermal differentiation markers. The data suggest a role for GLI2 in Hh-induced epidermal neoplasia by opposing epithelial cell cycle arrest signals and epidermal differentiation.