Deregulation of the hedgehog (HH) pathway results in overexpression of the GLI target BCL2 and is an initiating event in specific tumor types including basal cell carcinoma of the skin. Regulation of the HH pathway during keratinocyte differentiation is not well understood. We measured HH pathway activity in response to differentiation stimuli in keratinocytes. An upregulation of suppressor of fused (SUFU), a negative regulator of the HH pathway, lowered HH pathway activity and was accompanied by loss of BCL2 expression associated with keratinocyte differentiation. We used in vitro and in vivo models to demonstrate that ΔNp63α, a crucial regulator of epidermal development, activates SUFU transcription in keratinocytes. Increasing SUFU protein levels inhibited GLI-mediated gene activation in suprabasal keratinocytes and promoted differentiation. Loss of SUFU expression caused deregulation of keratinocyte differentiation and BCL2 overexpression. Using in vivo murine models, we also provide evidence of GLI-mediated regulation of the TP63 pathway. p63 expression appears essential to establish an optimally functioning HH pathway. These observations present a regulatory mechanism by which SUFU acts as an interacting node between the HH and TP63 pathways to mediate differentiation and maintain epidermal homeostasis. Disruption of this regulatory node can be an important contributor to multistep carcinogenesis.