The limited proteolysis of Cubitus interruptus (Ci), the transcription factor for the developmentally and medically important Hedgehog (Hh) signaling pathway, triggers a critical switch between transcriptional repressor and activator forms. Ci repressor is formed when the C terminus of full-length Ci is degraded by the ubiquitin-proteasome pathway, an unusual reaction since the proteasome typically completely degrades its substrates. We show that several regions of Ci are required for generation of the repressor form: the zinc finger DNA binding domain, a single lysine residue (K750) near the degradation end point, and a 163-amino-acid region at the C terminus. Unlike other proteins that are partially degraded by the proteasome, dimerization is not a key feature of Ci processing. Using a pulse-chase assay in cultured Drosophila cells, we distinguish between regions required for initiation of degradation and those required for the protection of the Ci N terminus from degradation. We present a model whereby the zinc finger region and K750 together form a unique protection signal that prevents the complete degradation of Ci by the proteasome.