The Sonic Hedgehog (SHH) signaling pathway is indispensable for development, and functions to activate a transcriptional program modulated by the GLI transcription factors. Here, we report that loss of a regulator of the SHH pathway, Suppressor of Fused (Sufu), resulted in early embryonic lethality in the mouse similar to inactivation of another SHH regulator, Patched1 (Ptch1). In contrast to Ptch1+/− mice, Sufu+/− mice were not tumor prone. However, in conjunction with p53 loss, Sufu+/− animals developed tumors including medulloblastoma and rhabdomyosarcoma. Tumors present in Sufu+/− p53−/− animals resulted from Sufu loss of heterozygosity. Sufu+/− p53−/− medulloblastomas also expressed a signature gene expression profile typical of aberrant SHH signaling, including upregulation of N-myc, Sfrp1, Ptch2 and cyclin D1. Finally, the Smoothened inhibitor, hedgehog antagonist, did not block growth of tumors arising from Sufu inactivation. These data demonstrate that Sufu is essential for development and functions as a tumor suppressor.