The Sonic Hedgehog (Shh) signaling pathway is important for neurogenesis in vivo. Gli transcription factors, effector proteins of the Shh signaling pathway, have neurogenic properties in vivo, which are still poorly understood. To study the molecular basis of neurogenic properties of Gli2, we used a well-established embryonic stem cell model, the P19 embryonal carcinoma (EC) cell line, which can be induced to differentiate into neurons in the presence of retinoic acid (RA). We found that, in the absence of RA, overexpression of Gli2 induced P19 EC cells to differentiate into neurons, but not astrocytes during the first ten days of differentiation. To our knowledge, this is the first indication that the expression of Gli factors can convert EC cells into neurons. Furthermore, Gli2 upregulated expression of the neurogenic basic helix-loop-helix (bHLH) factors, such as NeuroD, Neurog1 and Ascl1/Mash1 in P19 EC cells. Using chromatin immunoprecipitation assays, we showed that Gli2 bound to multiple regulatory regions in the Ascl1 gene, including promoter and enhancer regions during Gli2-induced neurogenesis. In addition, Gli2 activated the Ascl1/Mash1 promoter in vitro. Using the expression of a dominant-negative form of Gli2, fused to the Engrailed repression domain, we observed a reduction in gliogenesis and a significant downregulation of the bHLH factors Ascl1/Mash1, Neurog1 and NeuroD, leading to delayed neurogenesis in P19 EC cells, further supporting the hypothesis that Ascl1/Mash1 is a direct target of Gli2. In summary, Gli2 is sufficient to induce neurogenesis in P19 stem cells at least in part by directly upregulating Ascl1/Mash1. Our results provide mechanistic insight into the neurogenic properties of Gli2 in vitro, and offer novel plausible explanations for its in vivo neurogenic properties.