Ci/Gli zinc finger proteins mediate the transcriptional effects of Hedgehog protein signals. In Drosophila, Ci action as transcriptional repressor or activator is contingent upon Hedgehog-regulated, PKA-dependent proteolytic processing. We demonstrate that PKA-dependent processing of vertebrate Gli3 in developing limb similarly generates a potent repressor in a manner antagonized by apparent long-range signaling from posteriorly localized Sonic hedgehog protein. The resulting anterior/posterior Gli3 repressor gradient can be perturbed by mutations of Gli3 in human genetic syndromes or by misregulation of Gli3 processing in the chicken mutant talpid², producing a range of limb patterning malformations. The high relative abundance and potency of Gli3 repressor suggest specialization of Gli3 and its products for negative Hedgehog pathway regulation.