Induction of early pituitary progenitors is achieved through combined activities of signals from adjacent embryonic tissues. Previous studies have identified a requirement for oral ectoderm derived Sonic Hedgehog (Shh) in specification and/or proliferation of early pituitary progenitors, however how different Gli genes mediate Shh signaling to control pituitary progenitor development has not yet been determined. Here we show that Gli2, which encodes a major Gli activator, is required for proliferation of specific groups of pituitary progenitors but not for initial dorsoventral patterning. We further show that the action of Gli2 occurs prior to the closure of Rathke' pouch. Lastly, we show that Shh/Gli2 signaling controls the diencephalic expression of Bone morphogenetic protein 4 (Bmp4) and Fibroblast growth factor 8 (Fgf8), two genes that are known to play critical roles in patterning and growth of Rathke's pouch. Our results therefore suggest both cell-autonomous and non-cell-autonomous requirements for Gli2 in regulation of pituitary progenitor specification, proliferation and differentiation.