Members of the Hedgehog (Hh) family of secreted proteins have been identified recently as key signaling molecules that regulate a variety of inductive interactions central to the development of both Drosophila and vertebrates. Despite their widespread importance, the way in which Hh signals are transduced inside the cell remains poorly understood. The best candidate for a transcription factor that mediates Hh signaling in Drosophila is the product of the cubitus interruptus (ci) gene, a zinc finger protein that exhibits significant homology to protein products of the vertebrate GLI gene family. Here, we show that elevated levels of Ci are sufficient to activate patched (ptc) and other hh target genes, even in the absence of hh activity. We also show that Ci can function as a transcriptional activator in yeast and demonstrate that the zinc finger domain of the protein is sufficient for its target specificity. Finally, we identify sequences in the promoter region of the ptc gene, a primary target of Hh signaling, that are identical to the consensus-binding sequence of the GLI protein and are required for reporter gene expression in response to Hh activity. Taken together, our results strongly support the role for Ci as the transcriptional activator that mediates hh signaling.