Sonic hedgehog is a secreted factor regulating patterning of the anterior-posterior axis in the developing limb. The signaling pathway mediating the transduction of the signal is still poorly understood. In Drosophila several genes are known to act downstream of hedgehog, the fly homolog of Sonic hedgehog. An important gene epistatic to hedgehog is cubitus interruptus, which encodes the fly homolog of a family of vertebrate putative transcription factors, the GLI genes. We have isolated two members of the GLI family from chick, called GLI and GLI3. Their expression patterns in a variety of tissues during embryogenesis suggest that these genes may be targets of the Sonic hedgehog signal. We demonstrate that the two GLI genes are differentially regulated by Sonic hedgehog during limb development. Sonic hedgehog up-regulates GLI transcription, while down-regulating GLI3 expression in the mesenchymal cells of the developing limb bud. Finally, we demonstrate that an activated form of GLI can induce expression of Patched, a known target of Sonic hedgehog, thus implicating GLI as a key transcription factor in the vertebrate hedgehog signaling pathway. In conjunction with evidence from a mouse Gli3 mutant, our data suggest that GLI and GLI3 may have taken two different functions of their Drosophila homolog cubitus interruptus.