Sonic hedgehog (Shh) signaling is essential for sclerotome development in the mouse. Gli2 and Gli3 are thought to be the primary transcriptional mediators of Shh signaling; however, their roles in Shh induction of sclerotomal genes have not been investigated. Using a combination of mutant analysis and in vitro explant assays, we demonstrate that Gli2 and Gli3 are required for Shh-dependent sclerotome induction. Gli2(-/-)Gli3(-/-) embryos exhibit a severe loss of sclerotomal gene expression, and somitic mesoderm from these embryos cannot activate sclerotomal genes in response to exogenous Shh. We find that one copy of either Gli2 or Gli3 is required to mediate Shh induction of sclerotomal markers Pax1 and Pax9 in vivo and in vitro. Although Gli2 is generally considered an activator and Gli3 a repressor, our results also reveal a repressor function for Gli2 and an activator function for Gli3 in the developing somite. To further dissect the function of each Gli, we used adenovirus to overexpress Gli1, Gli2 and Gli3 in presomitic mesoderm explants. We find that each Gli preferentially activates a distinct set of Shh target genes, suggesting that the functions of Shh in patterning, growth and negative feedback are divided preferentially between different Gli proteins in the somite.