Basal cell carcinoma (BCC), the most common type of cancer, is characterized by aberrant Hedgehog (Hh) pathway activity. Mutations in pathway components, such as PATCHED1 (PTCH1), are commonly found in BCC. While the tumor suppressor role of PTCH1 in BCC is well established, how Hh pathway activation disrupts normal skin homeostasis to promote BCC formation remains poorly understood. Like Ptc1, Sufu is a major negative regulator of the Hh pathway. Previously, we showed that inactivation of Sufu in the skin does not result in BCC formation. Why loss of Ptc1, but not Sufu, in the epidermis induces BCC formation is unclear. In this report, we utilized gene expression profiling to identify biological pathways and processes that distinguish Sufu from Ptc1 mutants, and discovered a novel role for Sufu in cell cycle regulation. We demonstrated that the Hh pathway activation in Sufu and Ptc1 mutant skin is associated with abnormal cell cycle entry, ectopic expression of D-type cyclins and increased DNA damage. However, despite the presence of DNA damage, p53 stabilization was impaired in the mutant skin. Alternative mechanism to halt genomic instability is the activation of G2/M cell cycle checkpoint, which can occur independent of p53. We found that while Ptc1 mutant cells continue to cycle, which would favor genomic instability, loss of Sufu results in G2/M cell cycle arrest. This finding may explain why inactivation of Sufu is not sufficient to drive BCC formation. Taken together, these studies revealed a unique role for Sufu in G2/M phase progression, and uncovered the molecular and cellular features associated with Hh-driven BCC.