In Hedgehog (Hh) signaling, the GPCR-family protein Smoothened (Smo) acts as a signal transducer that is regulated by phosphorylation and ubiquitination, which ultimately change the cell surface accumulation of Smo. However, it is not clear whether Smo is regulated by other post-translational modifications, such as sumoylation. Here, we demonstrate that knockdown of the small ubiquitin-related modifier (SUMO) pathway components Ubc9 (a SUMO-conjugating enzyme E2), PIAS (a SUMO-protein ligase E3), and Smt3 (the SUMO isoform in Drosophila) by RNAi prevents Smo accumulation and alters Smo activity in the wing. We further show that Hh-induced-sumoylation stabilizes Smo, whereas desumoylation by Ulp1 destabilizes Smo in a phosphorylation independent manner. Mechanistically, we discover that excessive Krz, the Drosophila β-arrestin 2, inhibits Smo sumoylation and prevents Smo accumulation through Krz regulatory domain. Krz likely facilitates the interaction between Smo and Ulp1 because knockdown of Krz by RNAi attenuates Smo-Ulp1 interaction. Finally, we provide evidence that Cos2 is also sumoylated, which counteracts its inhibitory role on Smo accumulation in the wing. Taken together, we have uncovered a novel mechanism for Smo activation by sumoylation that is regulated by Hh and Smo interacting proteins.