In flies and mammals, extracellular Hedgehog (Hh) molecules alter cell fates and proliferation by regulating the levels and activities of Ci/Gli family transcription factors. How Hh-induced activation of transmembrane Smoothened (Smo) proteins reverses Ci/Gli inhibition by Suppressor of Fused (SuFu) and kinesin family protein (Cos2/Kif7) binding partners is a major unanswered question. Here we show that the Fused (Fu) protein kinase is activated by Smo and Cos2 via Fu- and CK1-dependent phosphorylation. Activated Fu can recapitulate a full Hh response, stabilizing full-length Ci via Cos2 phosphorylation and activating full-length Ci by antagonizing Su(fu) and by other mechanisms. We propose that Smo/Cos2 interactions stimulate Fu autoactivation by concentrating Fu at the membrane. Autoactivation primes Fu for additional CK1-dependent phosphorylation, which further enhances kinase activity. In this model, Smo acts like many transmembrane receptors associated with cytoplasmic kinases, such that pathway activation is mediated by kinase oligomerization and trans-phosphorylation.