Studies of hedgehog signaling in prostate development using anti-Shh antibodies, chemical inhibitors of hedgehog signaling and Shh(-/-) mutant mice have yielded conflicting data regarding the requirements of hedgehog signaling for normal ductal budding and glandular morphogenesis. We used transgenic mouse models in combination with chemical inhibitors and renal grafting to clarify the role of Hh signaling in prostate development. These studies showed that genetic loss of Shh is accompanied by an up-regulation of Indian Hedgehog (Ihh) and maintenance of Hh pathway activity. We found that while neither Gli1 nor Gli3 are required for normal prostate ductal budding, the urogenital sinus (UGS) of the Gli2(-/-) mutant mouse displays aberrant ductal budding in utero. When grown as a subcapsular graft, the Gli2(-/-) UGS exhibited prostatic differentiation but also displayed areas of focal epithelial hyperplasia. Functional redundancy between the three Gli transcription factors appears to mitigate the effect of Gli2 LOF as evidenced by residual Hh pathway activity in the E14 Gli2(-/-) UGS that could be inhibited by cyclopamine treatment. Together, these studies reveal a surprising degree of functional redundancy operating both at the level of the ligand and at the level of transcriptional regulation that effectively mitigates phenotypes associated with Hh-signaling perturbations.