Prostate embryonic development, pubertal and adult growth, maintenance, and regeneration are regulated through androgen signaling-mediated mesenchymal-epithelial interactions. Specifically, the essential role of mesenchymal androgen signaling in the development of prostate epithelium has been observed for over 30 years. However, the identity of the mesenchymal cells responsible for this paracrine regulation and related mechanisms are still unknown. Here, we provide the first demonstration of an indispensable role of the androgen receptor (AR) in sonic hedgehog (SHH) responsive Gli1-expressing cells, in regulating prostate development, growth, and regeneration. Selective deletion of AR expression in Gli1-expressing cells during embryogenesis disrupts prostatic budding and impairs prostate development and formation. Tissue recombination assays showed that urogenital mesenchyme (UGM) containing AR-deficient mesenchymal Gli1-expressing cells combined with wildtype urogenital epithelium (UGE) failed to develop normal prostate tissue in the presence of androgens, revealing the decisive role of AR in mesenchymal SHH responsive cells in prostate development. Prepubescent deletion of AR expression in Gli1-expressing cells resulted in severe impairment of androgen-induced prostate growth and regeneration. RNA-sequencing analysis showed significant alterations in signaling pathways related to prostate development, stem cells, and organ morphogenesis in AR-deficient Gli1-expressing cells. Among these altered pathways, the transforming growth factor β1 (TGFβ1) pathway was up-regulated in AR-deficient Gli1-expressing cells. We further demonstrated the activation of TGFβ1 signaling in AR-deleted prostatic Gli1-expressing cells, which inhibits prostate epithelium growth through paracrine regulation. These data demonstrate a novel role of the AR in the Gli1-expressing cellular niche for regulating prostatic cell fate, morphogenesis, and renewal, and elucidate the mechanism by which mesenchymal androgen-signaling through SHH-responsive cells elicits the growth and regeneration of prostate epithelium.