Auditory perception is mediated through a finite number of mechanosensory hair cells located in a specialized sensory epithelium within the inner ear. The formation of the appropriate number of hair cells and the location of those cells is crucial for normal auditory function. However, the factors that regulate the formation of this epithelium remain poorly understood. Truncating mutations in the transcription factor GLI3, a downstream effector of the Hedgehog (HH) pathway, lead to a partial loss of HH signaling and cause Pallister-Hall syndrome (PHS). Here, we report that cochleae from a mouse model of PHS (Gli3(Delta699)), which produces only the truncated, repressor form of GLI3, have a variably penetrant phenotype that includes an increase in the size of the sensory epithelium and the development of large ectopic sensory patches in Kölliker's organ (KO). Consistent with the mouse model, some PHS individuals exhibit hearing loss across a broad range of frequencies. Moreover, inhibition of HH signaling in vitro results in an increase in the size of the prosensory domain, a precursor population that gives rise to the sensory epithelium, whereas treatment with Sonic hedgehog (SHH) inhibits prosensory formation. Finally, we demonstrate that HH signaling within the cochlea regulates expression of prosensory markers and that the effects of HH in KO are dependent on activation of Notch, an inducer of prosensory fate. These results suggest that HH signaling plays a key role in the specification, size, and location of the prosensory domain, and therefore of hair cells, within the cochlea.