The Hedgehog (Hh) and Wingless (Wnt) families of secreted signaling molecules have key roles in embryonic development and adult tissue homeostasis [1-3]. In the developing neural tube, Wnt and Shh, emanating from dorsal and ventral regions, respectively, have been proposed to govern the proliferation and survival of neural progenitors [4-10]. Surprisingly, Shh is required for the growth and survival of cells in both ventral and dorsal neural tube [11]. Here we demonstrate that inhibition of Shh signaling causes a reduction in Wnt-mediated transcriptional activation. This reduction requires Gli3. Assays in embryos and cell lines indicate that repressor forms of the Hh-regulated transcription factor, Gli3 (Gli3R), which are generated in the absence of Hh signaling, inhibit canonical Wnt signaling. Gli3R acts by antagonizing active forms of the Wnt transcriptional effector, beta-catenin. Consistent with this, Gli3R appears to physically interact with the carboxy-terminal domain of beta-catenin, a region that includes the transactivation domain. These data offer an explanation for the proliferative defects in Shh null embryos and suggest a novel mechanism for crosstalk between the Hh and Wnt pathways.