Hedgehog signaling is often activated in tumors, yet it remains unclear how GLI2, a transcription factor activated by this pathway, acts as an oncogene. We show that GLI2 is a pleiotropic oncogene. The overexpression induces genomic instability and blocks differentiation, likely mediated in part by enhanced expression of the stem cell gene SOX2. GLI2 also induces transforming growth factor (TGF)B1-dependent transdifferentiation of foreskin and tongue, but not gingival fibroblasts into myofibroblasts, creating an environment permissive for invasion by keratinocytes, which are in various stages of differentiation having downregulated GLI2. Thus, upregulated GLI2 expression is sufficient to induce a number of the acquired characteristics of tumor cells; however, the stroma, in a tissue-specific manner, determines whether certain GLI2 oncogenic traits are expressed.