The Hedgehog (Hh) pathway is essential for normal embryonic development and tissue repair. The role of Hh signaling in hematopoiesis has been studied primarily by modulating the activity of Patched and Smoothened, but results have been conflicting. Some studies demonstrate a requirement for pathway activity in hematopoiesis, whereas others report that it is dispensable. Hh activity converges on the Gli transcription factors, but the specific role of these downstream effectors in hematopoiesis has not been reported. We have analyzed hematopoietic stem cell (HSC) and progenitor function in mice with a homozygous deletion of Gli1 (Gli1^null). Gli1^null mice have more long-term HSCs that are more quiescent and show increased engraftment after transplantation. In contrast, myeloid development is adversely affected with decreased in vitro colony formation, decreased in vivo response to granulocyte colony-stimulating factor (G-CSF), and impaired leukocyte recovery after chemotherapy. Levels of the proto-oncogene Cyclin D1 are reduced in Gli1^null mice and may explain the loss of proliferation seen in HSCs and progenitor cells. These data demonstrate that Gli1 regulates normal and stress hematopoiesis. Moreover, they suggest that Gli1 and Smoothened may not be functionally redundant, and direct GLI1 inhibitors may be needed to effectively block HH/GLI1 activity in human disease.