Hedgehog signaling is primarily transduced by two transcription factors: Gli2, which mainly acts as a full-length activator, and Gli3, which tends to be proteolytically processed from a full-length form (Gli3FL) to an N-terminal repressor (Gli3REP). Recent studies using a Sufu knockout mouse have indicated that Sufu is involved in regulating Gli2 and Gli3 activator and repressor activity at multiple steps of the signaling cascade; however, the mechanism of specific Gli2 and Gli3 regulation remains to be elucidated. In this study, we established an allelic series of ENU-induced mouse strains. Analysis of one of the missense alleles, SufuT396I, showed that Thr396 residue of Sufu played a key role in regulation of Gli3 activity. SufuT396I/T396I embryos exhibited severe polydactyly, which is indicative of compromised Gli3 activity. Concomitantly, significant quantitative reductions of unprocessed Gli3 (Gli3FL) and processed Gli3 (Gli3REP) were observed in vivo as well as in vitro. Genetic experiments showed that patterning defects in the limb buds of SufuT396I/T396I were rescued by a constitutive Gli3REP allele (Gli3∆699), strongly suggesting that SufuT396I reduced the truncated Gli3 repressor. In contrast, SufuT396I qualitatively exhibited no mutational effects on Gli2 regulation. Taken together, the results of this study show that the Thr396 residue of Sufu is specifically required for regulation of Gli3 but not Gli2. This implies a novel Sufu-mediated mechanism in which Gli2 activator and Gli3 repressor are differentially regulated.