Hedgehog signalling is crucial for development and is deregulated in several tumours, including medulloblastoma. Regulation of the transcriptional activity of Gli (glioma-associated oncogene) proteins, effectors of the Hedgehog pathway, is poorly understood. We show here that Gli1 and Gli2 are acetylated proteins and that their HDAC-mediated deacetylation promotes transcriptional activation and sustains a positive autoregulatory loop through Hedgehog-induced upregulation of HDAC1. This mechanism is turned off by HDAC1 degradation through an E3 ubiquitin ligase complex formed by Cullin3 and REN, a Gli antagonist lost in human medulloblastoma. Whereas high HDAC1 and low REN expression in neural progenitors and medulloblastomas correlates with active Hedgehog signalling, loss of HDAC activity suppresses Hedgehog-dependent growth of neural progenitors and tumour cells. Consistent with this, abrogation of Gli1 acetylation enhances cellular proliferation and transformation. These data identify an integrated HDAC- and ubiquitin-mediated circuitry, where acetylation of Gli proteins functions as an unexpected key transcriptional checkpoint of Hedgehog signalling.