Myelodysplastic syndromes (MDSs) are stem cell disorders with risk of transformation to acute myeloid leukemia (AML). Gene expression profiling reveals transcriptional expression of GLI1, of Hedgehog (Hh) signaling, in poor-risk MDS/AML. Using a murine model of MDS we demonstrated that constitutive Hh/Gli1 activation accelerated leukemic transformation and decreased overall survival. Hh/Gli1 activation resulted in clonal expansion of phenotypically defined granulocyte macrophage progenitors (GMPs) and acquisition of self-renewal potential in a non-self-renewing progenitor compartment. Transcriptome analysis of GMPs revealed enrichment in gene signatures of self-renewal pathways, operating via direct Gli1 activation. Using human cell lines we demonstrated that in addition to canonical Hh signaling, GLI1 is activated in a Smoothened-independent manner. GLI1 knockdown or inhibition with GANT61 resulted in decreased proliferation and clonogenic potential. Our data suggest that GLI1 activation is frequent in MDS during disease progression and inhibition of GLI1 is an attractive therapeutic target for a subset of patients.