The sonic hedgehog (Shh) pathway plays important roles in tumorigenesis, tumor growth, drug resistance, and metastasis. We and others have reported earlier that this pathway is highly activated in thyroid cancer. However, its role in thyroid cancer stem cell (CSC) self-renewal and tumor development remains incompletely understood. B lymphoma Mo-MLV insertion region 1 homolog (BMI1) and SRY-Box Transcription Factor 2 (SOX2) are two CSC-related transcription factors that have been implicated in promoting CSC self-renewal. The objective of our current investigation was to determine the role of the Shh pathway in regulating BMI1 and SOX2 expression in thyroid cancer and promoting thyroid tumor growth and development. Here we report that inhibition of the Shh pathway by Gli1 siRNA or by cyclopamine and GANT61 reduced BMI1 and SOX2 expression in SW1736 and KAT-18 cells, two anaplastic thyroid cancer cell lines. The opposite results were obtained in cells overexpressing Gli1 or its downstream transcription factor Snail. The Shh pathway regulated SOX2 and BMI1 expression at a transcriptional and post-transcriptional level, respectively. GANT61 treatment suppressed the growth of SW1736 CSC-derived tumor xenografts but did not significantly inhibit the growth of tumors grown from bulk tumor cells. Clinicopathological analyses of thyroid tumor specimens by immunohistochemical (IHC) staining revealed that BMI1 and SOX2 were highly expressed in thyroid cancer and correlated with Gli1 expression. Our study provides evidence that activation of the Shh pathway leads to increased BMI1 and SOX2 expression in thyroid cancer and promotes thyroid CSC-driven tumor initiation. Targeting the Shh pathway may have therapeutic value for treating thyroid cancer and preventing recurrence.