Chondrocytes, a unique cell type in cartilage tissue, are responsible for the regulation of anabolic and catabolic homeostasis in cartilage-specific extracellular matrix synthesis. Activation of Wnt/β-catenin signaling induces dedifferentiation of articular chondrocytes, resulting in suppression of type II collagen expression. We have shown previously that α-catenin inhibits β-catenin-Tcf/Lef (T-cell factor/lymphoid-enhancing factor) transcriptional activity in articular chondrocytes with a concomitant recovery of type II collagen expression. In the current study, we elucidated the mechanism underlying this inhibition of β-catenin-Tcf/Lef transcriptional activity by α-catenin, showing that it requires direct interaction between α-catenin and β-catenin. We further showed that it involves recruitment of Gli3R, the short transcription-repressing form of the transcription factor Gli3, to β-catenin by α-catenin. The resulting inhibition of β-catenin transcriptional activity leads to increased expression of type II collagen. Gli3R and α-catenin actions are co-dependent: both are necessary for the observed inhibitory effects on β-catenin transcriptional activity. Reducing Gli3R expression levels through activation of Indian Hedgehog (Ihh) signaling also is sufficient to activate β-catenin transcriptional activity, suggesting that the ternary complex, Gli3R·α-catenin·β-catenin, mediates Ihh-dependent activation of Wnt/β-catenin signaling in articular chondrocytes. Collectively, this study shows that α-catenin functions as a nuclear factor that recruits the transcriptional repressor Gli3R to β-catenin to inhibit β-catenin transcriptional activity and dedifferentiation of articular chondrocytes. Finally, osteoarthritic cartilage showed elevated levels of β-catenin and decreased levels of α-catenin and Gli3R, suggesting that decreased levels of α-catenin and Gli3R levels contribute to increased β-catenin transcriptional activity during osteoarthritic cartilage destruction.