Cilia are essential for mammalian embryonic development as well as for the physiological activity of various adult organ systems. Despite the multiple crucial roles that cilia play, the mechanisms underlying ciliogenesis in mammals remain poorly understood. Taking a forward genetic approach, we have identified Hearty (Hty), a recessive lethal mouse mutant with multiple defects, including neural tube defects, abnormal dorsal-ventral patterning of the spinal cord, a defect in left-right axis determination and severe polydactyly (extra digits). By genetic mapping, sequence analysis of candidate genes and characterization of a second mutant allele, we identify Hty as C2cd3, a novel gene encoding a vertebrate-specific C2 domain-containing protein. Target gene expression and double-mutant analyses suggest that C2cd3 is an essential regulator of intracellular transduction of the Hedgehog signal. Furthering a link between Hedgehog signaling and cilia function, we find that cilia formation and proteolytic processing of Gli3 are disrupted in C2cd3 mutants. Finally, we observe C2cd3 protein at the basal body, consistent with its essential function in ciliogenesis. Interestingly, the human ortholog for this gene lies in proximity to the critical regions of Meckel-Gruber syndrome 2 (MKS2) and Joubert syndrome 2 (JBTS2), making it a potential candidate for these two human genetic disorders.