Development of basal cell carcinomas (BCCs) in skin is associated with uncontrolled Sonic hedgehog (Shh) signaling, which operates primarily through the Gli family of transcription factors. Gli2 is a mediator of physiological Shh signaling in skin and is sufficient to produce BCCs when overexpressed by use of a Keratin 5 (K5) promoter. Analysis of Gli protein deletion mutants has identified an NH(2)-terminal transcription repressor domain in Gli2 but not Gli1. To assess the potential involvement of the Gli2 repressor domain in skin tumor development, we overexpressed the Gli2DeltaN2 mutant in transgenic mice by use of the K5 promoter. K5-Gli2DeltaN2 mice developed a variety of skin tumors resembling human trichoblastomas, cylindromas, basaloid follicular hamartomas, and rarely, BCCs. In striking contrast, K5-Gli2 mice overexpressing wild-type Gli2 developed only BCCs. Other differences between tumors arising in these two sets of transgenic mice included their gross appearance, growth rate, and predilection for specific body sites. However, the expression levels of Shh target genes, which reflect the magnitude of Shh pathway activation, were not dramatically different. Tumors from K5-Gli2DeltaN2 mice, unlike human or mouse BCCs, gave rise to cell lines that constitutively expressed Shh target genes in vitro and were tumorigenic in nude mice. Interestingly, the phenotype of K5-Gli2DeltaN2 mice was strikingly similar to that reported after K5 promoter-driven overexpression of GLI1, which lacks an NH(2)-terminal region homologous to the Gli2 repressor domain. These results underscore the qualitative difference in oncogenicity of GLI1 and Gli2 when overexpressed in skin, and reveal a previously unanticipated role for the Gli2 NH(2) terminus in defining tumor phenotype.