Sonic hedgehog (Shh) is an indispensable, extrinsic cue that regulates progenitor and stem cell behavior in the developing and adult mammalian central nervous system. Here, we investigate the link between the Shh signaling pathway and Hes1, a classical Notch target. We show that Shh-driven stabilization of Hes1 is independent of Notch signaling and requires the Shh effector Gli2. We identify Gli2 as a primary mediator of this response by showing that Gli2 is required for Hh (Hedgehog)-dependent up-regulation of Hes1. We also show using chromatin immunoprecipitation that Gli2 binds to the Hes1 promoter, which suggests that Hes1 is a Hh-dependent direct target of Gli2 signaling. Finally, we show that Shh stimulation of progenitor proliferation and cell diversification requires Gli2 and Hes1 activity. This paper is the first demonstration of the mechanistic and functional link between Shh, Gli, and Hes1 in the regulation of progenitor cell behavior.