Human basal cell carcinomas (BCCs) very frequently carry p53 mutations, and p53 loss markedly accelerates murine BCC carcinogenesis. We report here our studies of the mechanism by which p53 is activated to suppress BCC carcinogenesis. We find that aberrant hedgehog signaling in microscopic BCCs activates p53 in part via Arf (that is, the oncogene-induced stress pathway) but not via the DNA damage response pathway. However, Arf loss and p53 loss produce differing outcomes—loss of p53 promotes both tumor initiation and progression; loss of Arf promotes tumor progression but not initiation. Intriguingly, increased expression of Arf in tumor stromal cells, as in tumor keratinocytes themselves, contributes to suppression of BCC carcinogenesis.