Truncating GLI3 mutations in Pallister-Hall Syndrome with renal malformation suggests a requirement for Hedgehog signaling during renal development. HH-dependent signaling increases levels of GLI transcriptional activators and decreases processing of GLI3 to a shorter transcriptional repressor. Previously, we showed that Shh-deficiency interrupts early inductive events during renal development in a manner dependent on GLI3 repressor. Here we identify a novel function for GLI3 repressor in controlling nephron number. During renal morphogenesis, HH signaling activity, assayed by expression of Ptc1-lacZ, is localized to ureteric cells of the medulla, but is undetectable in the cortex. Targeted inactivation of Smo, the HH effector, in the ureteric cell lineage causes no detectable abnormality in renal morphogenesis. The functional significance of absent HH signaling activity in cortical ureteric cells was determined by targeted deletion of Ptc1, the SMO inhibitor, in the ureteric cell lineage. Ptc1(-/-UB) mice demonstrate ectopic Ptc1-lacZ expression in ureteric branch tips and renal hypoplasia characterized by reduced kidney size and a paucity of mature and intermediate nephrogenic structures. Ureteric tip cells are remarkable for abnormal morphology and impaired expression of Ret and Wnt11, markers of tip cell differentiation. A finding of renal hypoplasia in Gli3(-/-) mice suggests a pathogenic role for reduced GLI3 repressor in the Ptc1(-/-UB) mice. Indeed, constitutive expression of GLI3 repressor via the Gli3(Delta699) allele in Ptc1(-/-UB) mice restores the normal pattern of HH signaling, and expression of Ret and Wnt11 and rescued the renal phenotype. Thus, GLI3 repressor controls nephron number by regulating ureteric tip cell expression of Wnt11 and Ret.