Gli3 is a zinc-finger transcription factor whose activity is dependent on the level of hedgehog (Hh) ligand. Hh signaling has key roles during endochondral ossification; however, its role in intramembranous ossification is still unclear. In this study, we show that Gli3 performs a dual role in regulating both osteoprogenitor proliferation and osteoblast differentiation during intramembranous ossification. We discovered that Gli3Xt-J/Xt-J mice, which represent a Gli3-null allele, exhibit craniosynostosis of the lambdoid sutures and that this is accompanied by increased osteoprogenitor proliferation and differentiation. These cellular changes are preceded by ectopic expression of the Hh receptor Patched1 and reduced expression of the transcription factor Twist1 in the sutural mesenchyme. Twist1 is known to delay osteogenesis by binding to and inhibiting the transcription factor Runx2. We found that Runx2 expression in the lambdoid suture was altered in a pattern complimentary to that of Twist1. We therefore propose that loss of Gli3 results in a Twist1-, Runx2-dependent expansion of the sutural osteoprogenitor population as well as enhanced osteoblastic differentiation which results in a bony bridge forming between the parietal and interparietal bones. We show that FGF2 will induce Twist1, normalize osteoprogenitor proliferation and differentiation and rescue the lambdoid suture synostosis in Gli3Xt-J/Xt-J mice. Taken together, we define a novel role for Gli3 in osteoblast development; we describe the first mouse model of lambdoid suture craniosynostosis and show how craniosynostosis can be rescued in this model.