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Primary cilia are essential for transduction of the Hedgehog (Hh) signal in mammals. We investigated the role of primary cilia in regulation of Patched1 (Ptc1), the receptor for Sonic Hedgehog (Shh). Ptc1 localized to cilia and inhibited Smoothened (Smo) by preventing its accumulation within cilia. When Shh bound to Ptc1, Ptc1 left the cilia, leading to accumulation of Smo and activation of signaling. Thus, primary cilia sense Shh and transduce signals that play critical roles in development, carcinogenesis, and stem cell function.