Hedgehog (Hh) signaling regulates cell differentiation and patterning in a wide variety of embryonic tissues. In vertebrates, at least three Gli transcription factors (Gli1, Gli2, and Gli3) are involved in Hh signal transduction. Comparative studies have revealed divergent requirements for Gli1 and Gli2 in zebrafish and mouse. Here, we address the question of whether Gli3 function has also diverged in zebrafish and analyze the regulatory interactions between Hh signaling and Gli activity. We find that zebrafish Gli3 has an early function as an activator of Hh target genes that overlaps with Gli1 activator function in the ventral neural tube. In vitro reporter analysis shows that Gli3 cooperates with Gli1 to activate transcription in the presence of high concentrations of Hh. During late somitogenesis stages, Gli3 is required as a repressor of the Hh response. Gli3 shares this repressor activity with Gli2 in the dorsal spinal cord, hindbrain, and midbrain, but not in the forebrain. Consistently, zebrafish Gli3 blocks Gli1-mediated activation of a reporter gene in the absence of Hh in vitro. In the eye, Gli3 is also required for proper ath5 expression and the differentiation of retinal ganglion cells (RGCs). These results reveal a conserved role for Gli3 in vertebrate development and uncover novel regional functions and regulatory interactions among gli genes.