The Drosophila segment polarity gene cubitus interruptus (ci) encodes a zinc finger protein that is required for the proper patterning of segments and imaginal discs. Epistasis analysis indicates that ci functions in the Hedgehog (Hh) signal transduction pathway and is required to maintain wingless expression in the embryo. In this paper, the role of the Ci protein in the Hh signaling pathway is examined in more detail. Our results show that ectopic expression of ci in imaginal discs and the embryo activates the expression of Hh target genes. One of these target genes, patched, forms a negative feedback loop with ci that is regulated by Hh signal transduction. Activation is also achieved using the Ci zinc finger domain fused to a heterologous transactivation domain. Conversely, repression of Hh target genes occurs in animals expressing the Ci zinc finger domain fused to a repression domain. To examine Ci function in more detail, regions of the Ci protein that are responsible for its ability to transactivate and its subcellular distribution have been identified.