Hedgehog (Hh) signaling, via the key signal transducer Smoothened (SMO) and Gli transcription factors, is essential for embryonic development and carcinogenesis. At present, the molecular mechanism of Hh signaling-mediated carcinogenesis is not completely understood. Using a mouse model (K14cre/ R26SmoM2) of SMO-mediated basal cell carcinoma development, we identified TGF2 as a major Hh-regulated gene. TGF2 expression was high in the keratinocytes, with activated TGF signaling (indicated by elevated expression of phosphorylated SMAD2/3) detected in both tumor and stroma. The significance of TGF signaling for SMO function was demonstrated in two assays. Down-regulation of TGF2 expression prevented Hh signaling-dependent osteoblast differentiation and motor neuron differentiation. Furthermore, inhibition of TGF signaling by TGF receptor I inhibitor SD208 significantly reduced tumor area in K14cre/R26SmoM2 mice. Tumor shrinkage in mice was associated with an increased number of lymphocytes, suggesting an immune suppression role of TGF signaling. The relevance of our results to human cancer is reflected by the fact that human basal cell carcinomas, which almost always harbor activated Hh signaling, have activated TGF signaling, as indicated by high levels of phosphorylated SMAD2 and SMAD3 in tumor and stroma. Together, our data indicate that TGF signaling is critical for Hh signaling-mediated carcinogenesis.The Hedgehog pathway plays an important role in cell differentiation, tissue polarity, cell proliferation, and carcinogenesis (1-4). The seven-transmembrane domain-containing protein Smoothened (SMO) 4 serves as the key player for signal transduction of this pathway, whose function is inhibited by another transmembrane protein, Patched (PTC), in the absence of Hh ligands. Binding of Hh to its receptor PTC releases this inhibition, allowing SMO to signal downstream, leading to formation of active forms of Gli transcription factors. As transcription factors, Gli molecules can regulate target gene expression by direct association with a specific consensus sequence located at the promoter region of the target genes (5). In addition to the canonical pathways (ligand overexpression, altered expression of Hh signaling molecules, or gene mutations), recent studies indicate that Hh signaling can also be activated by other signaling pathways, such as K-Ras. Both canonical and non-canonical Hh signaling activation are found in many types of human cancer, including brain tumors, gastrointestinal, prostate, lung, and breast cancers (6 -8).Mounting evidence indicates that Hh signaling activation occurs frequently in a number of human cancers (9), but the underlying molecular basis remains largely elusive. To understand the molecular basis by which Hh signaling regulates carcinogenesis, we analyzed gene expression of a mouse model of basal cell carcinoma in which an activated form of SMO (SmoM2) replaces the wild type SMO allele and is expressed under the control of the keratin 14 promoter. Our results indicated that ...