Hedgehog signaling regulates differentiation, survival, and proliferation of the earliest double-negative (DN) thymocytes, but its importance at later stages of T-cell development is controversial. Here we use loss-and gain-of-function mouse models to show that Shh, by signaling directly to the developing thymocyte, is a negative regulator of pre-TCR-induced differentiation from DN to double-positive (DP) cell. When hedgehog signaling was reduced, in the Shh ؊/؊ and Gli2 ؊/؊ thymus, or by T lineage-specific transgenic expression of a transcriptional-repressor form of Gli2 (Gli2⌬C 2 ), differentiation to DP cell after pre-TCR signal transduction was increased. In contrast, when Hh signaling was constitutively activated in thymocytes, by transgenic expression of a constitutive transcriptional-activator form of Gli2 (Gli2⌬N 2 ), the production of DP cells was decreased. Gene expression profiling showed that physiologic Hh signaling in thymocytes maintains expression of the transcription factor FoxA2 on pre-TCR signal transduction. (Blood. 2009;113:5144-5156)