The vulva of the Caenorhabditis elegans hermaphrodite develops from a subset of six vulval precursor cells (VPCs) by the combined effect of the Ras, Wingless and Notch signaling cascades, and of three redundant synMuv (synthetic Multivulva) pathways grouped into classes A, B and C. Here we show that signaling via the GLI- (Glioma-associated protein) like transcription factor TRA-1, which is the terminal regulator of the C. elegans sex determination cascade, is a newly discovered pathway specifying vulval cell fates. We found that TRA-1 accumulates in, and regulates the fusion process of, cells (including the VPCs and hypodermal cells) involved in vulval patterning. TRA-1 also influenced the expression of the Hox gene lin-39, a central regulator of vulval development. Furthermore, inactivation of tra-1, which transforms animals with hermaphrodite-specific karyotype into males, promoted vulval induction in synMuv A, but not in synMuv B, mutant background. This implies that TRA-1 interacts with the class B synMuv genes, many of which are involved in chromatin-mediated transcriptional repression of cell proliferation. These results may help to understand how compromised GLI activity in humans leads to cancer. Together, we suggest that the GLI protein family involved in several key developmental processes in both invertebrates and vertebrates regulates somatic cell fates through influencing, at least in part, the expression of specific Hox genes.