The Hedgehog (Hh) signaling pathway plays important roles in both embryonic development and adult tissue regeneration and homeostasis. Inappropriate activation of the Hh pathway has been linked to malignancies such as basal cell carcinoma and medulloblastoma. In Drosophila, the Hh signal is transduced through a receptor system at the plasma membrane, which includes the receptor complex Patched-Interference Hh (Ptc-Ihog) and the signal transducer Smo. Binding of Hh to Ptc-Ihog relieves the Ptc-mediated inhibition of Smo, which allows Smo to activate the cubitus interruptus (Ci)/Gli family of zinc finger transcription factors and thereby induce the expression of Hh target genes such as decapentaplegic (dpp), patched (ptc), collier (col) and engrailed (en). Though Hh signal transduction has been widely studied, it is still unclear how Ptc inhibits Smo to block the activation of the Hh pathway and how Ptc inhibition of Smo is relieved by Hh stimulation. We report here that Hh elevates the production of phosphatidylinositol 4-phosphate (PI(4)P), a specific phospholipid that directly interacts with Smo through an arginine motif in the Smo C-terminal tail and promotes Smo phosphorylation, activation, and ciliary localization. Ptc also interacts with PI(4)P, which is inhibited by Hh stimulation, indicating that Hh triggers the release of PI(4)P from Ptc. We further uncover that Hh induces the production of PI(4)P, likely by regulating PI(4)P kinase and phosphatase. Finally, in addition to the direct role in regulating Smo phosphorylation, G protein-coupled receptor kinase 2 (Gprk2) facilitates PI(4)P interaction with Smo. This study suggest that PI(4)P acts as a special small molecule shuttling between Ptc and Smo to modulate Hh responses.