The Hedgehog (Hh) family of secreted proteins regulates mammalian development and cancer formation through Gli transcription factors, which exist in both activator and repressor forms. In vertebrates, the primary cilia play an essential role in Hh signal transduction and are required for both the activator and repressor activities of Gli proteins. In the current study, we demonstrate that mouse Suppressor of Fused (Sufu) interacts with Gli proteins and inhibits Gli activator activity in the absence of cilia. Removal of Sufu in both Smoothened (Smo) and Ift88 mutants, respectively, leads to full activation of Hh signaling, suggesting that Smo-mediated repression of Sufu, but not the inhibitory function of Sufu, requires cilia. Finally, we show that Sufu is important for proper activator/repressor ratio of Gli3 protein in mice, both in the presence and absence of cilia.