Hedgehog (Hh) morphogen governs embryonic development and tissue homeostasis through the Ci/Gli family transcription factors. Here we report that Hh induces phase separation of the fused (Fu)/Ulk family kinases to allosterically regulate Ci/Gli. We find that Hh-induced phosphorylation of Fu/Ulk3 promotes SUMOylation of their inverted phosphorylation-dependent SUMOylation motifs. Subsequent interaction between SUMO and SUMO-interacting motif drives Fu/Ulk3 self-assembly to form biomolecular condensates that recruit Ci-Sufu and Gli-Sufu in the cytoplasm and primary cilium, respectively. Within the condensates, Fu/Ulk3 undergoes a conformational change to expose Ci/Gli for Fu/Ulk3-mediated phosphorylation and activation, leading to gradual accumulation of nuclear CiA/GliA transcriptional complexes in proportion to ligand dose and exposure time. Our findings provide mechanistic insights into the spatiotemporal control of Hh signal transduction, reveal previously unexplored regulatory mechanism and function for biomolecular condensation, and establish a paradigm for kinase-mediated signal transduction whereby a kinase allosterically activates its substrate through ligand-induced and condensation-driven conformational change.