Hedgehog (HH) signaling in the epidermis is primarily mediated by the zinc finger transcription factors GLI1 and GLI2. Exquisite regulation of HH/GLI signaling is crucial for proper specification of the epidermal lineage and development of its derivatives, whereas dysregulation of HH/GLI signaling disrupts tissue homeostasis and causes basal cell carcinoma (BCC). Similarly, bone morphogenetic proteins (BMPs) and activins have been described as key signaling factors in the complex regulation of epidermal fate decisions, although their precise interplay with HH/GLI is largely elusive. Here we show that, in human epidermal cells, expression of the activin/BMP antagonist follistatin (FST) is predominantly up-regulated by the HH effector GLI2. Consistently, we found strong FST expression in the outer root sheath of human hair follicles and BCC. Detailed promoter analysis showed that two sequences with homology to the GLI consensus binding site are required for GLI2-mediated activation. Interestingly, activation of the FST promoter is highly GLI2-specific, because neither GLI1 nor GLI3 can significantly increase FST transcription. GLI2 specificity requires the presence of a 518-bp fragment in the proximal FST promoter region. On the protein level, sequences C-terminal to the zinc finger are responsible for GLI2-specific activation of FST transcription, pointing to the existence of GLI-interacting cofactors that modulate GLI target specificity. Our results reveal a key role of GLI2 in activation of the activin/BMP antagonist FST in response to HH signaling and provide new evidence for a regulatory interaction between HH and activin/BMP signaling in hair follicle development and BCC.