Several studies have linked cilia and Hedgehog signaling, but the precise roles of ciliary proteins in signal transduction remain enigmatic. Here we describe a mouse mutation, hennin (hnn), that causes coupled defects in cilia structure and Sonic hedgehog (Shh) signaling. The hnn mutant cilia are short with a specific defect in the structure of the ciliary axoneme, and the hnn neural tube shows a Shh-independent expansion of the domain of motor neuron progenitors. The hnn mutation is a null allele of Arl13b, a small GTPase of the Arf/Arl family, and the Arl13b protein is localized to cilia. Double mutant analysis indicates that Gli3 repressor activity is normal in hnn embryos, but Gli activators are constitutively active at low levels. Thus, normal structure of the ciliary axoneme is required for the cell to translate different levels of Shh ligand into differential regulation of the Gli transcription factors that implement Hedgehog signals.