Zinc finger-containing Gli proteins mediate responsiveness to Hedgehog (Hh) signaling, with Gli2 acting as the major transcriptional activator in this pathway in mice. The discovery of disease-associated mutations points to a critical role for GLI2 in human Hh signaling as well. Here, we show that human GLI2 contains previously undescribed 5′ sequence, extending the amino-terminus an additional 328 amino acids. In vitro, transcriptional activity of full-length GLI2 is up to 30 times lower than that of GLI2ΔN (previously thought to represent the entire GLI2 protein), revealing the presence of an amino-terminal repressor domain in the full-length protein. GLI2ΔN also exhibits potent transcriptional activity in vivo: overexpression in mouse skin leads to the formation of Hh-independent epithelial downgrowths resembling basal cell carcinomas, which in humans are associated with constitutive Hh signaling. The discovery of this additional, functionally relevant GLI2 sequence led us to re-examine several pathogenic human GLI2 mutants, now containing the entire amino-terminal domain. On the basis of the functional domains affected by the mutations, mutant GLI2 proteins exhibited either loss-of-function or dominant-negative activity. Moreover, deletion of the amino-terminus abrogated dominant-negative activity of mutant GLI2, revealing that this domain is required for transcriptional repressor activity of pathogenic GLI2. Our results establish the presence of an amino-terminal transcriptional repressor domain that plays a critical role in modulating the function of wild-type GLI2 and is essential for dominant-negative activity of a GLI2 mutant associated with human disease.