Obstructive and nonobstructive forms of hydronephrosis (increased diameter of the renal pelvis and calyces) and hydroureter (dilatation of the ureter) are the most frequently detected antenatal abnormalities, yet the underlying molecular mechanisms are largely undefined. Hedgehog (Hh) proteins control tissue patterning and cell differentiation by promoting GLI-dependent transcriptional activation and by inhibiting the processing of GLI3 to a transcriptional repressor. Genetic mutations that generate a truncated GLI3 protein similar in size to the repressor in humans with Pallister-Hall syndrome (PHS; a disorder whose characteristics include renal abnormalities) and hydroureter implicate Hh-dependent signaling in ureter morphogenesis and function. Here, we determined that Hh signaling controls 2 cell populations required for the initiation and transmission of coordinated ureter contractions. Tissue-specific inactivation of the Hh cell surface effector Smoothened (Smo) in the renal pelvic and upper ureteric mesenchyme resulted in nonobstructive hydronephrosis and hydroureter characterized by ureter dyskinesia. Mutant mice had reduced expression of markers of cell populations implicated in the coordination of unidirectional ureter peristalsis (specifically, Kit and hyperpolarization-activation cation-3 channel [Hcn3]), but exhibited normal epithelial and smooth muscle cell differentiation. Kit deficiency in a mouse model of PHS suggested a pathogenic role for GLI3 repressor in Smo-deficient embryos; indeed, genetic inactivation of Gli3 in Smo-deficient mice rescued their hydronephrosis, hydroureter, Kit and Hcn3 expression, and ureter peristalsis. Together, these data demonstrate that Hh signaling controls Kit and Hcn3 expression and ureter peristalsis.