Previous studies have defined a requirement for Sonic hedgehog (Shh) signaling in patterning the ventral telencephalon, a major source of the neuronal diversity found in the mature telencephalon. The zinc finger transcription factor Gli3 is a critical component of the Shh signaling pathway and its loss causes major defects in telencephalic development. Gli3 is expressed in a graded manner along the dorsoventral axis of the telencephalon but it is unknown whether Gli3 expression levels are important for dorsoventral telencephalic patterning. To address this, we used the Gli3 hypomorphic mouse mutant Polydactyly Nagoya (Pdn). We show that in Pdn/Pdn embryos, the telencephalic expression of Gli3 remains graded, but Gli3 mRNA and protein levels are reduced, resulting in an upregulation of Shh expression and signaling. These changes mainly affect the development of the lateral ganglionic eminence (LGE), with some disorganization of the medial ganglionic eminence mantle zone. The pallial/subpallial boundary is shifted dorsally and the production of postmitotic neurons is reduced. Moreover, LGE pioneer neurons that guide corticofugal axons into the LGE do not form properly, delaying the entry of corticofugal axons into the ventral telencephalon. Pdn/Pdn mutants also show severe pathfinding defects of thalamocortical axons in the ventral telencephalon. Transplantation experiments demonstrate that the intrinsic ability of the Pdn ventral telencephalon to guide thalamocortical axons is compromised. We conclude that correct Gli3 levels are particularly important for the LGE's growth, patterning, and development of axon guidance capabilities.