The seven-transmembrane protein Smoothened (Smo) and Zn-finger transcription factor Ci/Gli are crucial components in Hedgehog (Hh) signal transduction that mediates a variety of processes in animal development. In Drosophila, multiple kinases have been identified to regulate Hh signaling by phosphorylating Smo and Ci; however, the phosphatase(s) involved remain obscured. Using an in vivo RNAi screen, we identified PP4 and PP2A as phosphatases that influence Hh signaling by regulating Smo and Ci, respectively. RNAi knockdown of PP4, but not of PP2A, elevates Smo phosphorylation and accumulation, leading to increased Hh signaling activity. Deletion of a PP4-interaction domain (amino acids 626-678) in Smo promotes Smo phosphorylation and signaling activity. We further find that PP4 regulates the Hh-induced Smo cell-surface accumulation. Mechanistically, we show that Hh downregulates Smo-PP4 interaction that is mediated by Cos2. We also provide evidence that PP2A is a Ci phosphatase. Inactivating PP2A regulatory subunit (Wdb) by RNAi or by loss-of-function mutation downregulates, whereas overexpressing regulatory subunit upregulates, the level and thus signaling activity of full-length Ci. Furthermore, we find that Wdb counteracts kinases to prevent Ci phosphorylation. Finally, we have obtained evidence that Wdb attenuates Ci processing probably by dephosphorylating Ci. Taken together, our results suggest that PP4 and PP2A are two phosphatases that act at different positions of the Hh signaling cascade.