Mammalian Sonic hedgehog (Shh) signaling is essential for embryonic development and stem cell maintenance and has critical roles in tumorigenesis. Although core components of the Shh pathway are conserved in evolution, important aspects of mammalian Shh signaling are not shared with the Drosophila pathway. Perhaps the most dramatic difference between the Drosophila and mammalian pathways is that Shh signaling in the mouse requires a microtubule-based organelle, the primary cilium. Proteins that are required for the response to Shh are enriched in the cilium, but it is not clear why the cilium provides an appropriate venue for signal transduction. Here, we demonstrate that Kif7, a mammalian homologue of Drosophila Costal2 (Cos2), is a cilia-associated protein that regulates signaling from the membrane protein Smoothened (Smo) to Gli transcription factors. By using a Kif7 mutant allele identified in a reporter-based genetic screen, we show that, similar to Drosophila and zebrafish Cos2, mouse Kif7 acts downstream of Smo and upstream of Gli2 and has both negative and positive roles in Shh signal transduction. Mouse Kif7 activity depends on the presence of cilia and Kif7-eGFP localizes to base of the primary cilium in the absence of Shh. Activation of the Shh pathway promotes trafficking of Kif7-eGFP from the base to the tip of the cilium, and localization to the tip of the cilium is disrupted in a motor domain mutant. We conclude that Kif7 is a core regulator of Shh signaling that may also act as a ciliary motor.