Cubitus interruptus (Ci) is a transcriptional factor that is positively regulated by the hedgehog (hh) signaling pathway. Recent work has shown that a 75-kDa proteolytic product of the full-length CI protein translocates to the nucleus and represses the transcription of CI target genes. In cells that receive the hh signal, the proteolysis of CI is inhibited and the full-length protein can activate the hh target genes. Because protein kinase A (PKA) inhibits the expression of the hh target genes in developing embryos and discs and the loss of PKA activity results in elevated levels of full-length CI protein, PKA might be involved directly in the regulation of CI proteolysis. Here we demonstrate that the PKA pathway antagonizes the hh pathway by phosphorylating CI. We show that the PKA-mediated phosphorylation of CI promotes its proteolysis from the full-length active form to the 75-kDa repressor form. The PKA catalytic subunit increases the proteolytic processing of CI and the PKA inhibitor, PKI, blocks the processing. In addition, cells do not process the CI protein to the 75-kDa repressor when all of the PKA sites in CI are mutated. Mutant CI proteins that cannot be phosphorylated by PKA have increased transcriptional activity compared with wild-type CI. In addition, exogenous PKA can increase further the transcriptional activity of the CI mutant, suggesting that PKA has a second positive, indirect effect on CI activity. In summary, we show that the modulation of the hh signaling pathway by PKA occurs directly at the level of CI phosphorylation.