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The steroidal alkaloid cyclopamine has both teratogenic and antitumor activities arising from its ability to specifically block cellular responses to vertebrate Hedgehog signaling. We show here, using photoaffinity and fluorescent derivatives, that this inhibitory effect is mediated by direct binding of cyclopamine to the heptahelical bundle of Smoothened (Smo). Cyclopamine also can reverse the retention of partially misfolded Smo in the endoplasmic reticulum, presumably through binding-mediated effects on protein conformation. These observations reveal the mechanism of cyclopamine's teratogenic and antitumor activities and further suggest a role for small molecules in the physiological regulation of Smo.