The Hedgehog (Hh) pathway, an evolutionarily conserved key regulator of embryonic patterning and tissue homeostasis, controls its target genes by managing the processing and activities of the Gli/Ci transcription factors. Little is known about the nuclear co-factors the Gli/Ci proteins recruit, and how they mechanistically control Hh target genes. Here, we provide evidence for the involvement of Parafibromin/Hyx as a positive component in Hh signaling. We found that hyx RNAi impaired Hh pathway activity in Drosophila cell culture. Consistent with an evolutionarily conserved function in Hh signaling, RNAi-mediated knockdown of Parafibromin in mammalian cell culture experiments diminished the transcriptional activity of Gli1 and Gli2. In vivo, in Drosophila, genetic impairment of hyx decreased the expression of the high-threshold Hh target gene knot/collier. Conversely, hyx overexpression ameliorated the inhibitory activity of Ptc and Ci(75) misexpression during Drosophila wing development. We subsequently found that Parafibromin can form a complex with all three Glis, and provide evidence that Parafibromin/Hyx directly binds Region 1, the Su(fu) interaction domain, in the N-terminus of all Glis and Ci. Taken together, our results suggest a target gene-selective involvement of the PAF1 complex in Hh signaling via the Parafibromin/Hyx-mediated recruitment to Gli/Ci.