Control of Gli function by Suppressor of Fused (Sufu), a major negative regulator, is a key step in mammalian Hedgehog (Hh) signaling, but how this is achieved in the nucleus is unknown. We found that Hh signaling results in reduced Sufu protein levels and Sufu dissociation from Gli proteins in the nucleus, highlighting critical functions of Sufu in the nucleus. Through a proteomic approach, we identified several Sufu-interacting proteins, including p66b (a member of the NuRD [nucleosome remodeling and histone deacetylase] repressor complex) and Mycbp (a Myc-binding protein). p66b negatively and Mycbp positively regulate Hh signaling in cell-based assays and zebrafish. They function downstream from the membrane receptors, Patched and Smoothened, and the primary cilium. Sufu, p66b, Mycbp, and Gli are also detected on the promoters of Hh targets in a dynamic manner. Our results support a new model of Hh signaling in the nucleus. Sufu recruits p66b to block Gli-mediated Hh target gene expression. Meanwhile, Mycbp forms a complex with Gli and Sufu without Hh stimulation but remains inactive. Hh pathway activation leads to dissociation of Sufu/p66b from Gli, enabling Mycbp to promote Gli protein activity and Hh target gene expression. These studies provide novel insight into how Sufu controls Hh signaling in the nucleus.