Temporally and spatially constrained Hedgehog (Hh) signaling regulates cyclic growth of hair follicle epithelium while constitutive Hh signaling drives the development of basal cell carcinomas (BCCs), the most common cancers in humans. Using mice engineered to conditionally express the Hh effector Gli2, we show that continued Hh signaling is required for growth of established BCCs. Transgene inactivation led to BCC regression accompanied by reduced tumor cell proliferation and increased apoptosis, leaving behind a small subset of nonproliferative cells that could form tumors upon transgene reactivation. Nearly all BCCs arose from hair follicles, which harbor cutaneous epithelial stem cells, and reconstitution of regressing tumor cells with an inductive mesenchyme led to multilineage differentiation and hair follicle formation. Our data reveal that continued Hh signaling is required for proliferation and survival of established BCCs, provide compelling support for the concept that these tumors represent an aberrant form of follicle organogenesis, and uncover potential limitations to treating BCCs using Hh pathway inhibitors.