Truncating mutations in Gli3, an intracellular effector in the SHH-SMO-GLI signaling pathway, cause renal aplasia/dysplasia in humans and mice. Yet, the pathogenic mechanisms are undefined. Here, we report the effect of decreased SHH-SMO signaling on renal morphogenesis, the expression of SHH target genes and GLI binding to Shh target genes. Shh deficiency or cyclopamine-mediated SMO inhibition disrupted renal organogenesis, decreased expression of GLI1 and GLI2 proteins, but increased expression of GLI3 repressor relative to GLI3 activator. Shh deficiency decreased expression of kidney patterning genes (Pax2 and Sall1) and cell cycle regulators (cyclin D1 and MYCN). Elimination of Gli3 in Shh(-/-) mice rescued kidney malformation and restored expression of Pax2, Sall1, cyclin D1, MYCN, Gli1 and Gli2. To define mechanisms by which SHH-SMO signaling controls gene expression, we determined the binding of GLI proteins to 5' flanking regions containing GLI consensus binding sequences in Shh target genes using chromatin immunoprecipitation. In normal embryonic kidney tissue, GLI1 and/or GLI2 were bound to each target gene. By contrast, treatment of embryonic kidney explants with cyclopamine decreased GLI1 and/or GLI2 binding, and induced binding of GLI3. However, cyclopamine failed to decrease Gli1 and Gli2 expression and branching morphogenesis in Gli3-deficient embryonic kidney tissue. Together, these results demonstrate that SHH-SMO signaling controls renal morphogenesis via transcriptional control of Gli, renal patterning and cell cycle regulator genes in a manner that is opposed by GLI3.