Loss of function mutations of Kif7, the vertebrate orthologue of the Drosophila Hh pathway component Costal2, cause defects in the limbs and neural tubes of mice, attributable to ectopic expression of Hh target genes. While this implies a functional conservation of Cos2 and Kif7 between flies and vertebrates, the association of Kif7 with the primary cilium, an organelle absent from most Drosophila cells, suggests their mechanisms of action may have diverged. Here, using mutant alleles induced by Zinc Finger Nuclease-mediated targeted mutagenesis, we show that in zebrafish, Kif7 acts principally to suppress the activity of the Gli1 transcription factor. Notably, we find that endogenous Kif7 protein accumulates not only in the primary cilium, as previously observed in mammalian cells, but also in cytoplasmic puncta that disperse in response to Hh pathway activation. Moreover, we show that Drosophila Costal2 can substitute for Kif7, suggesting a conserved mode of action of the two proteins. We show that Kif7 interacts with both Gli1 and Gli2a and suggest that it functions to sequester Gli proteins in the cytoplasm, in a manner analogous to the regulation of Ci by Cos2 in Drosophila. We also show that zebrafish Kif7 potentiates Gli2a activity by promoting its dissociation from the Suppressor of Fused (Sufu) protein and present evidence that it mediates a Smo dependent modification of the full length form of Gli2a. Surprisingly, the function of Kif7 in the zebrafish embryo appears restricted principally to mesodermal derivatives, its inactivation having little effect on neural tube patterning, even when Sufu protein levels are depleted. Remarkably, zebrafish lacking all Kif7 function are viable, in contrast to the peri-natal lethality of mouse kif7 mutants but similar to some Acrocallosal or Joubert syndrome patients who are homozygous for loss of function KIF7 alleles.