Sonic hedgehog (Shh) binds to its receptor patched (PTCH), leading to the activation and repression of target genes via the GLI family of zinc-finger transcription factors. Deregulation of the Shh pathway is associated with basal cell carcinoma (BCC) due to upregulation of GLI1 and GLI2. We recently demonstrated a positive feedback loop between GLI1 and GLI2, which revealed that GLI1 may be a direct target of GLI2. Using band shift and luciferase reporter assays, we now show that GLI2 binds the GLI-binding consensus sequence in the GLI1 promoter. These data suggest that GLI2 directly activates GLI1 and that retrovirally expressed GLI2 induces expression of endogenous GLI1 in human primary keratinocytes. Finally, using in situ hybridization, we show that GLI2 is expressed in the interfollicular epidermis and the outer root sheath of hair follicles in normal skin as well as in BCC tumor islands. These results suggest an important role for GLI2 in regulating epidermal proliferation and skin tumorigenesis.