Although Hedgehog (Hh) signaling regulates cell differentiation during pancreas organogenesis, the consequences of pathway up-regulation in adult β-cells in vivo have not been investigated. Here, we elevate Hh signaling in β-cells by expressing an active version of the GLI2 transcription factor, a mediator of the Hh pathway, in β-cells that are also devoid of primary cilia, a critical regulator of Hh activity. We show that increased Hh signaling leads to impaired β-cell function and insulin secretion, resulting in glucose intolerance in transgenic mice. This phenotype was accompanied by reduced expression of both genes critical for β-cell function and transcription factors associated with their mature phenotype. Increased Hh signaling further correlated with increased expression of the precursor cell markers Hes1 and Sox9, both direct Hh targets that are normally excluded from β-cells. Over time, the majority of β-cells down-regulated GLI2 levels, thereby regaining the full differentiation state and restoring normoglycemia in transgenic mice. However, sustained high Hh levels in some insulin-producing cells further eroded the β-cell identity and eventually led to the development of undifferentiated pancreatic tumors. Summarily, our results indicate that deregulation of the Hh pathway impairs β-cell function by interfering with the mature β-cell differentiation state.