The cancer stem cell hypothesis suggests that malignant growth depends on a subset of tumor cells with stem cell-like properties of self-renewal. Because hedgehog (Hh) signaling regulates progenitor cell fate in normal development and homeostasis, aberrant pathway activation might be involved in the maintenance of such a population in cancer. Indeed, mutational activation of the Hh pathway is associated with medulloblastoma and basal cell carcinoma; pathway activity is also critical for growth of other tumors lacking such mutations, although the mechanism of pathway activation is poorly understood. Here we study the role and mechanism of Hh pathway activation in multiple myeloma (MM), a malignancy with a well defined stem cell compartment. In this model, rare malignant progenitors capable of clonal expansion resemble B cells, whereas the much larger tumor cell population manifests a differentiated plasma cell phenotype that pathologically defines the disease. We show that the subset of MM cells that manifests Hh pathway activity is markedly concentrated within the tumor stem cell compartment. The Hh ligand promotes expansion of MM stem cells without differentiation, whereas the Hh pathway blockade, while having little or no effect on malignant plasma cell growth, markedly inhibits clonal expansion accompanied by terminal differentiation of purified MM stem cells. These data reveal that Hh pathway activation is heterogeneous across the spectrum of MM tumor stem cells and their more differentiated progeny. The potential existence of similar relationships in other adult cancers may have important biologic and clinical implications for the study of aberrant Hh signaling.