Hedgehog and parathyroid hormone-related protein (PTHrP) signaling play important roles regulating the differentiation of chondrocytes, which form the template for growing bone. By studying the interaction of the pathways in normal and neoplastic growth-plate chondrocytes (from enchondromas, a benign cartilage tumor), an unexpected direct regulation of hedgehog-mediated transcriptional activation by parathyroid hormone-related protein was uncovered. This regulation acts through the processing of the hedgehog-activated transcription factor, glioma-associated oncogene-three (Gli3). When PTHrP activates its receptor, Gli3 is processed to its repressor form though a protein kinase A (PKA) -dependent mechanism. Thus, activation of a G protein-coupled receptor can negatively regulate hedgehog-mediated transcription independent of hedgehog ligand activity, raising intriguing therapeutic possibilities.