Hedgehogs (Hhs) are key signaling regulators of stem cell maintenance and tissue patterning in embryos, and activating mutations in the pathway that increase Gli transcriptional activity are causal in a diversity of cancers. Here, we report that phosphoinositide 3-kinase (PI3-kinase)-dependent Akt activation is essential for Sonic Hedgehog (Shh) signaling in the specification of neuronal fates in chicken neural explants, chondrogenic differentiation of 10T1/2 cells, and Gli activation in NIH 3T3 cells. Stimulation of PI3-kinase/Akt by insulin-like growth factor I potentiates Gli activation induced by low levels of Shh; however, insulin-like growth factor I alone is insufficient to induce Gli-dependent transcription. Protein kinase A (PKA) and glycogen synthase kinase 3β sequentially phosphorylate Gli2 at multiple sites, identified by mutagenesis, thus resulting in a reduction of its transcriptional activity. Gli2 mutant proteins in which the major PKA and glycogen synthase kinase 3β phosphorylation sites were mutated to alanine remain fully transcriptionally active; however, PKA-mutant Gli2 functions independently of Akt signaling, indicating that Akt positively regulates Shh signaling by controlling PKA-mediated Gli inactivation. Our findings provide a basis for the synergistic role of PI3-kinase/Akt in Hh signaling in embryonic development and Hh-dependent tumors.