Vertebrate Hedgehog (Hh) signaling is initiated at primary cilia by the ligand-triggered accumulation of Smoothened (Smo) in the ciliary membrane. The underlying biochemical mechanisms remain unknown. We find that Hh agonists promote the association between Smo and Evc2, a ciliary protein that is defective in two human ciliopathies. The formation of the Smo-Evc2 complex is under strict spatial control, being restricted to a distinct ciliary compartment, the EvC zone. Mutant Evc2 proteins that localize in cilia but are displaced from the EvC zone are dominant inhibitors of Hh signaling. Disabling Evc2 function blocks Hh signaling at a specific step between Smo and the downstream regulators protein kinase A and Suppressor of Fused, preventing activation of the Gli transcription factors. Our data suggest that the Smo-Evc2 signaling complex at the EvC zone is required for Hh signal transmission and elucidate the molecular basis of two human ciliopathies.