The Hedgehog (Hh) signaling pathway regulates tissue patterning during development, including patterning and growth of limbs and face, but whether Hh signaling plays a role in adult kidney remains undefined. In this study, using a panel of hedgehog-reporter mice, we show that the two Hh ligands (Indian hedgehog and sonic hedgehog ligands) are expressed in tubular epithelial cells. We report that the Hh effectors (Gli1 and Gli2) are expressed exclusively in adjacent platelet-derived growth factor receptor-β-positive interstitial pericytes and perivascular fibroblasts, suggesting a paracrine signaling loop. In two models of renal fibrosis, Indian Hh ligand was upregulated with a dramatic activation of downstream Gli effector expression. Hh-responsive Gli1-positive interstitial cells underwent 11-fold proliferative expansion during fibrosis, and both Gli1- and Gli2-positive cells differentiated into α-smooth muscle actin-positive myofibroblasts. In the pericyte-like cell line 10T1/2, hedgehog ligand triggered cell proliferation, suggesting a possible role for this pathway in the regulation of cell cycle progression of myofibroblast progenitors during the development of renal fibrosis. The hedgehog antagonist IPI-926 abolished Gli1 induction in vivo but did not decrease kidney fibrosis. However, the transcriptional induction of Gli2 was unaffected by IPI-926, suggesting the existence of smoothened-independent Gli activation in this model. This study is the first detailed description of paracrine hedgehog signaling in adult kidney, which indicates a possible role for hedgehog-Gli signaling in fibrotic chronic kidney disease.