In vertebrates, Hedgehog (Hh) signaling initiated in primary cilia activates the membrane protein Smoothened (Smo) and leads to activation of Gli proteins, the transcriptional effectors of the pathway. In the absence of signaling, Gli proteins are inhibited by the cytoplasmic protein Suppressor of Fused (SuFu). It is unclear how Hh activates Gli and whether it directly regulates SuFu. We find that Hh stimulation quickly recruits endogenous SuFu-Gli complexes to cilia, suggesting a model in which Smo activates Gli by relieving inhibition by SuFu. In support of this model, we find that Hh causes rapid dissociation of the SuFu-Gli complex, thus allowing Gli to enter the nucleus and activate transcription. Activation of protein kinase A (PKA), an inhibitor of Hh signaling, blocks ciliary localization of SuFu-Gli complexes, which in turn prevents their dissociation by signaling. Our results support a simple mechanism in which Hh signals at vertebrate cilia cause dissociation of inactive SuFu-Gli complexes, a process inhibited by PKA.