The seven transmembrane protein Smoothened (Smo) is a critical component of the Hedgehog (Hh) signaling pathway and is regulated by phosphorylation, dimerization, and cell-surface accumulation upon Hh stimulation. However, it is not clear how Hh regulates Smo accumulation on the cell surface or how Hh regulates the intracellular trafficking of Smo. In addition, little is known about whether ubiquitination is involved in Smo regulation. In this study, we demonstrate that Smo is multi-monoubiquitinated and that Smo ubiquitination is inhibited by Hh and by phosphorylation. Using an in vivo RNAi screen, we identified ubiquitin-specific protease 8 (USP8) as a deubiquitinase that down-regulates Smo ubiquitination. Inactivation of USP8 increases Smo ubiquitination and attenuates Hh-induced Smo accumulation, leading to decreased Hh signaling activity. Moreover, overexpression of USP8 prevents Smo ubiquitination and elevates Smo accumulation, leading to increased Hh signaling activity. Mechanistically, we show that Hh promotes the interaction of USP8 with Smo aa625-753, which covers the three PKA and CK1 phosphorylation clusters. Finally, USP8 promotes the accumulation of Smo at the cell surface and prevents localization to the early endosomes, presumably by deubiquitinating Smo. Our studies identify USP8 as a positive regulator in Hh signaling by down-regulating Smo ubiquitination and thereby mediating Smo intracellular trafficking.