Primary cilia are required for proper Sonic Hedgehog (Shh) signaling in mammals. However, their role in the signal transduction process remains unclear. We have identified sister of open brain ( sopb ), a null allele of mouse Intraflagellar transport protein 122 ( Ift122 ). IFT122 negatively regulates the Shh pathway in the cilium at a step downstream of the Shh ligand and the transmembrane protein Smoothened, but upstream of the Gli2 transcription factor. Ift122 sopb mutants generate primary cilia, but they show features of defective retrograde intraflagellar transport. IFT122 controls the ciliary localization of Shh pathway regulators in different ways. Disruption of IFT122 leads to accumulation of Gli2 and Gli3 at cilia tips while blocking the ciliary localization of the antagonist TULP3. Suppressor of Fused and Smoothened localize to the cilium through an IFT122-independent mechanism. We propose that the balance between positive and negative regulators of the Shh pathway at the cilium tip controls the output of the pathway and that Shh signaling regulates this balance through intraflagellar transport.