The Hedgehog (Hh) pathway plays important roles during embryogenesis and carcinogenesis. Here, we show that ablation of the mouse Suppressor of fused (Sufu), an intracellular pathway component, leads to embryonic lethality at approximately E9.5 with cephalic and neural tube defects. Fibroblasts derived from Sufu(-/-) embryos showed high Gli-mediated Hh pathway activity that could not be modulated at the level of Smoothened and could only partially be blocked by PKA activation. Despite the robust constitutive pathway activation in the Sufu(-/-) fibroblasts, the GLI1 steady-state localization remained largely cytoplasmic, implying the presence of an effective nuclear export mechanism. Sufu(+/-) mice develop a skin phenotype with basaloid changes and jaw keratocysts, characteristic features of Gorlin syndrome, a human genetic disease linked to enhanced Hh signaling. Our data demonstrate that, in striking contrast to Drosophila, in mammals, Sufu has a central role, and its loss of function leads to potent ligand-independent activation of the Hh pathway.