Uncontrolled activation of the Hedgehog (Hh) signaling pathway, operating through GLI transcription factors, plays a central role in the pathogenesis of cutaneous basal cell carcinoma and contributes to the development of several malignancies arising in extracutaneous sites. We now report that K5-tTA;tetO-Gli2 bitransgenic mice develop distinctive epithelial tumors within their jaws. These tumors consist of large masses of highly proliferative, monomorphous, basaloid cells with scattered foci of keratinization and central necrosis, mimicking human basaloid squamous cell carcinoma (BSCC), an aggressive upper aerodigestive tract tumor. Like human BSCC, these tumors express epidermal basal keratins and differentiation-specific keratins within squamous foci. Mouse BSCCs express high levels of Gli2 and Hh target genes, including Gli1 and Ptch1, which we show are also upregulated in a subset of human BSCCs. Mouse BSCCs appear to arise from distinct epithelial sites, including the gingival junctional epithelium and epithelial rests of Malassez, a proposed stem cell compartment. Although Gli2 transgene expression is restricted to epithelial cells, we also detect striking alterations in bone adjacent to BSCCs, with activated osteoblasts, osteoclasts and osteal macrophages, indicative of active bone remodeling. Gli2 transgene inactivation resulted in rapid BSCC regression and reversal of the bone remodeling phenotype. This first-reported mouse model of BSCC supports the concept that uncontrolled Hh signaling plays a central role in the pathogenesis of a subset of human BSCCs, points to Hh/GLI2 signaling as a potential therapeutic target and provides a powerful new tool for probing the mechanistic underpinnings of tumor-associated bone remodeling.