Sterol synthesis is required for Sonic hedgehog (Shh) signal transduction. Errors in Shh signal transduction play important roles in the formation of human tumors, including medulloblastoma (MB). It is not clear which products of sterol synthesis are necessary for Shh signal transduction or how they act. Here we show that cholesterol or specific oxysterols are the critical products of sterol synthesis required for Shh pathway signal transduction in MB cells. In MB cells, sterol synthesis inhibitors reduce Shh target gene transcription and block Shh pathway-dependent proliferation. These effects of sterol synthesis inhibitors can be reversed by exogenous cholesterol or specific oxysterols. We also show that certain oxysterols can maximally activate Shh target gene transcription through the Smoothened (Smo) protein as effectively as the known Smo full agonist, SAG. Thus, sterols are required and sufficient for Shh pathway activation. These results suggest that oxysterols may be critical regulators of Smo, and thereby Shh signal transduction. Inhibition of Shh signaling by sterol synthesis inhibitors may offer a novel approach to the treatment of MB and other Shh pathway-dependent human tumors.