Although mutations that activate the Hedgehog (Hh) signalling pathway have been linked to several types of cancer, the molecular and cellular basis of Hh's ability to induce tumour formation is not well understood. We identified a mutation in patched (ptc), an inhibitor of Hh signalling, in a genetic screen for regulators of the Retinoblastoma (Rb) pathway in Drosophila. Here we show that Hh signalling promotes transcription of Cyclin E and Cyclin D, two inhibitors of Rb, and principal regulators of the cell cycle during development in Drosophila. Upregulation of Cyclin E expression, accomplished through binding of Cubitus interruptus (Ci) to the Cyclin E promoter, mediates the ability of Hh to induce DNA replication. Upregulation of Cyclin D expression by Hh mediates the distinct ability of Hh to promote cellular growth. The discovery of a direct connection between Hh signalling and principal cell-cycle regulators provides insight into the mechanism by which deregulated Hh signalling promotes tumour formation.