During development, Sonic hedgehog (Shh) regulates the proliferation of cerebellar granule neuron precursors (GNPs) in part via expression of Nmyc. We present evidence supporting a novel role for the Mad family member Mad3 in the Shh pathway to regulate Nmyc expression and GNP proliferation. Mad3 mRNA is transiently expressed in GNPs during proliferation. Cultured GNPs express Mad3 in response to Shh stimulation in a cyclopamine-dependent manner. Mad3 is necessary for Shh-dependent GNP proliferation as measured by bromodeoxyuridine incorporation and Nmyc expression. Furthermore, Mad3 overexpression, but not that of other Mad proteins, is sufficient to induce GNP proliferation in the absence of Shh. Structure-function analysis revealed that Max dimerization and recruitment of the mSin3 corepressor are required for Mad3-mediated GNP proliferation. Surprisingly, basic-domain-dependent DNA binding of Mad3 is not required, suggesting that Mad3 interacts with other DNA binding proteins to repress transcription. Interestingly, cerebellar tumors and pretumor cells derived from patched heterozygous mice express high levels of Mad3 compared with adjacent normal cerebellar tissue. Our studies support a novel role for Mad3 in cerebellar GNP proliferation and possibly tumorigenesis, and they challenge the current paradigm that Mad3 should antagonize Nmyc by competition for direct DNA binding via Max dimerization.