Inactivation of Gli3, a key component of Hedgehog signaling in vertebrates, results in formation of additional digits (polydactyly) during limb bud development. The analysis of mouse embryos constitutively lacking Gli3 has revealed the essential GLI3 functions in specifying the anteroposterior (AP) limb axis and digit identities. We conditionally inactivated Gli3 during mouse hand plate development, which uncoupled the resulting preaxial polydactyly from known GLI3 functions in establishing AP and digit identities. Our analysis revealed that GLI3 directly restricts the expression of regulators of the G₁–S cell-cycle transition such as Cdk6 and constrains S phase entry of digit progenitors in the anterior hand plate. Furthermore, GLI3 promotes the exit of proliferating progenitors toward BMP-dependent chondrogenic differentiation by spatiotemporally restricting and terminating the expression of the BMP antagonist Gremlin1. Thus, Gli3 is a negative regulator of the proliferative expansion of digit progenitors and acts as a gatekeeper for the exit to chondrogenic differentiation.