The transcriptional program orchestrated by Hedgehog signaling depends on the Gli family of transcription factors. Gli proteins can be converted to either transcriptional activators or truncated transcriptional repressors. We show that the interaction between Gli3 and Suppressor of Fused (Sufu) regulates the formation of either repressor or activator forms of Gli3. In the absence of signaling, Sufu restrains Gli3 in the cytoplasm, promoting its processing into a repressor. Initiation of signaling triggers the dissociation of Sufu from Gli3. This event prevents formation of the repressor and instead allows Gli3 to enter the nucleus, where it is converted into a labile, differentially phosphorylated transcriptional activator. This key dissociation event depends on Kif3a, a kinesin motor required for the function of primary cilia. We propose that the Sufu-Gli3 interaction is a major control point in the Hedgehog pathway, a pathway that plays important roles in both development and cancer.