Hedgehog (Hh) signaling plays essential roles in animal development and tissue homeostasis, and its misregulation causes congenital diseases and cancers. Regulation of the ubiquitin/proteasome-mediated proteolysis of Ci/Gli transcription factors is central to Hh signaling, but whether deubiquitinase is involved in this process remains unknown. Here, we show that Hh stimulates the binding of a ubiquitin-specific protease Usp7 to Ci, which positively regulates Hh signaling activity through inhibiting Ci ubiquitination and degradation mediated by both Slimb-Cul1 and Hib-Cul3 E3 ligases. Furthermore, we find that Usp7 forms a complex with GMP-synthetase (GMPS) to promote Hh pathway activity. Finally, we show that the mammalian counterpart of Usp7, HAUSP, positively regulates Hh signaling by modulating Gli ubiquitination and stability. Our findings reveal a conserved mechanism by which Ci/Gli is stabilized by a deubiquitination enzyme and identify Usp7/HUASP as a critical regulator of Hh signaling and potential therapeutic target for Hh-related cancers.