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Hedgehog (Hh) signaling is implicated in bone development and cellular transformation. Here we demonstrate that inhibition of Hh pathway activity inhibits tumor growth through effects on the microenvironment. Pharmacological inhibition of the Hh effector Smoothened (Smo) increased trabecular bone in vivo and inhibited osteoclastogenesis in vitro. In addition, enhanced Hh signaling due to heterozygosity of the Hh inhibitory receptor Patched (Ptch1+/-) increased bone resorption, suggesting direct regulation of osteoclast activity by the Hh pathway. Ptch1+/- mice had increased bone metastatic and subcutaneous tumor growth, suggesting that increased Hh activation in host cells promoted tumor growth. Subcutaneous growth of Hh-resistant tumor cells was inhibited by LDE225, a novel orally bioavailable Smo antagonist, consistent with effects on tumor microenvironment. Knockdown of the Hh ligand Sonic Hh (SHH) in these cells decreased subcutaneous tumor growth and decreased stromal cell production of IL-6, indicating that tumor-derived Hh ligands stimulated tumor growth in a paracrine fashion. Together our findings demonstrate that inhibition of the Hh pathway can reduce tumor burden, regardless of tumor Hh responsiveness, through effects on tumor cells, osteoclasts and stromal cells within the tumor microenvironment. Hh may be a promising therapeutic target for solid cancers and bone metastases.