Sonic hedgehog (Shh) signaling is a developmental signal cascade that plays an essential role in regulating embryogenesis and tissue homeostasis. Here, we investigated the potential role of Shh signaling in renal interstitial fibrogenesis. Ureteral obstruction induced Shh, predominantly in the renal tubular epithelium of the fibrotic kidneys. Using Gli1(lacZ) knock-in mice, we identified renal interstitial fibroblasts as Shh-responding cells. In cultured renal fibroblasts, recombinant Shh protein activated Gli1 and induced α-smooth muscle actin (α-SMA), desmin, fibronectin, and collagen I expression, suggesting that Shh signaling promotes myofibroblast activation and matrix production. Blockade of Shh signaling with cyclopamine abolished the Shh-mediated induction of Gli1, Snail1, α-SMA, fibronectin, and collagen I. In vivo, the kidneys of Gli1-deficient mice were protected against the development of interstitial fibrosis after obstructive injury. In wild-type mice, cyclopamine did not affect renal Shh expression but did inhibit induction of Gli1, Snail1, and α-SMA. In addition, cyclopamine reduced matrix expression and mitigated fibrotic lesions. These results suggest that tubule-derived Shh mediates epithelial-mesenchymal communication by targeting interstitial fibroblasts after kidney injury. We conclude that Shh/Gli1 signaling plays a critical role in promoting fibroblast activation, production of extracellular matrix, and development of renal interstitial fibrosis.