The secreted protein hedgehog (Hh) plays a critical role in the developmental patterning of multiple tissues. In Drosophila melanogaster, a cytosolic multiprotein signaling complex appears necessary for Hh signaling. Genes that encode components of this Hh signaling complex (HSC) were originally identified and characterized based on their genetic interactions with hh, as well as with each other. It is only in recent years that the mechanistic functions of these components have begun to be unraveled. Here, we have investigated the relationship between two components of the HSC, the serine/threonine protein kinase Fused (Fu) and the kinesin-related protein Costal2 (Cos2). We have reconstituted a Fu/Cos2 complex in vitro and shown that Fu is able to directly associate with Cos2, forming a complex whose molecular size is similar to a previously described complex found in Drosophila cell extracts. We have also determined that the carboxyl-terminal domain of Fu is necessary and sufficient for the direct binding of Fu to Cos2. To validate the physiological relevance of this interaction, we overexpressed the carboxyl-terminal domain of Fu in wild-type flies. These flies exhibit a phenotype similar to that seen in fu mutants and consistent with an hh loss-of-function phenotype. We conclude that the carboxyl-terminal domain of Fu can function in a dominant negative manner, by preventing endogenous Fu from binding to Cos2. Thus, we provide the first evidence that Hh signaling can be compromised by targeting the HSC for disruption.