Hedgehog (HH) signaling is one of the key pathways with major significance for embryogenesis, tumorigenesis, and stem cell maintenance. Glioma-associated oncogene 1 (GLI1) is a transcription factor that acts as the terminal signaling effector but also represents a pathway target gene. Here we report the identification and functional properties of novel GLI1 splice variants generated by skipping exons 2 and 3 and encoding an N-terminal truncated GLI1 protein (GLI1DeltaN). Analysis of the GLI1DeltaN mRNAs in adult human tissues revealed comparable expression levels to the full-length GLI1 (GLI1FL), whereas in tumor cell lines a generally lower and more variable expression pattern was observed. Furthermore, GLI1DeltaN is up-regulated by HH signaling to the same extent as GLI1FL but has a weaker capacity to activate transcription. However, in specific cellular contexts GLI1DeltaN may be more potent than GLI1FL in activating endogenous gene expression. Moreover, the dual-specificity tyrosine phosphorylation-regulated kinase 1 (Dyrk1) potentiates the transcriptional activity of GLI1FL but not GLI1DeltaN. Interestingly, GLI1FL, in contrast to GLI1DeltaN, is localized solely at the nucleus, in line with its increased transcriptional capacity. The negative regulator of the pathway, Suppressor of Fused (SUFU), elicits a cytoplasmic retention of the GLI1 isoforms, which is more pronounced for GLI1FL, as this contains an N-terminal SUFU binding domain. Collectively, our findings reveal that the activation mechanism of the terminal transducer of the pathway, GLI1, is mediated not only by GLI1FL but also by the GLI1DeltaN variant.