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Defects in the biogenesis of or transport through primary cilia affect Hedgehog protein signaling, and many Hedgehog pathway components traffic through or accumulate in cilia. The Hedgehog receptor Patched negatively regulates the activity and ciliary accumulation of Smoothened, a seven-transmembrane protein that is essential for transducing the Hedgehog signal. We found that this negative regulation of Smoothened required the ciliary localization of Patched, as specified either by its own cytoplasmic tail or by provision of heterologous ciliary localization signals. Surprisingly, given that Hedgehog binding promotes the exit of Patched from the cilium, we observed that an altered form of Patched that is retained in the cilium nevertheless responded to Hedgehog, resulting in Smoothened activation. Our results indicate that whereas ciliary localization of Patched is essential for suppression of Smoothened activation, the primary event enabling Smoothened activation is binding of Hedgehog to Patched, and Patched ciliary removal is secondary.