Intrinsic ureteropelvic junction obstruction is the most common cause of congenital hydronephrosis, yet the underlying pathogenesis is undefined. Hedgehog proteins control morphogenesis by promoting GLI-dependent transcriptional activation and inhibiting the formation of the GLI3 transcriptional repressor. Hedgehog regulates differentiation and proliferation of ureteric smooth muscle progenitor cells during murine kidney-ureter development. Histopathologic findings of smooth muscle cell hypertrophy and stroma-like cells, consistently observed in obstructing tissue at the time of surgical correction, suggest that Hedgehog signaling is abnormally regulated during the genesis of congenital intrinsic ureteropelvic junction obstruction. Here, we demonstrate that constitutively active Hedgehog signaling in murine intermediate mesoderm-derived renal progenitors results in hydronephrosis and failure to develop a patent pelvic-ureteric junction. Tissue obstructing the ureteropelvic junction was marked as early as E13.5 by an ectopic population of cells expressing Ptch2, a Hedgehog signaling target. Constitutive expression of GLI3 repressor in Ptch1-deficient mice rescued ectopic Ptch2 expression and obstructive hydronephrosis. Whole transcriptome analysis of isolated Ptch2+ cells revealed coexpression of genes characteristic of stromal progenitor cells. Genetic lineage tracing indicated that stromal cells blocking the ureteropelvic junction were derived from intermediate mesoderm-derived renal progenitors and were distinct from the smooth muscle or epithelial lineages. Analysis of obstructive ureteric tissue resected from children with congenital intrinsic ureteropelvic junction obstruction revealed a molecular signature similar to that observed in Ptch1-deficient mice. Together, these results demonstrate a Hedgehog-dependent mechanism underlying mammalian intrinsic ureteropelvic junction obstruction.