How cell numbers are determined is not understood. Hedgehog-Gli activity is involved in precursor cell proliferation and stem cell self-renewal, and its deregulation sustains the growth of many human tumours. However, it is not known whether GLI1, the final mediator of Hh signals, controls stem cell numbers, and how its activity is restricted to curtail tumourigenesis. Here we have altered the levels of GLI1 and p53, the major tumour suppressor, in multiple systems. We show that GLI1 expression in Nestin+ neural progenitors increases precursor and clonogenic stem cell numbers in vivo and in vitro. In contrast, p53 inhibits GLI1-driven neural stem cell self-renewal, tumour growth and proliferation. Mechanistically, p53 inhibits the activity, nuclear localisation and levels of GLI1 and in turn, GLI1 represses p53, establishing an inhibitory loop. We also find that p53 regulates the phosphorylation of a novel N' truncated putative activator isoform of GLI1 in human cells. The balance of GLI1 and p53 functions, thus, determines cell numbers, and prevalence of p53 restricts GLI1-driven stem cell expansion and tumourigenesis.