Hedgehog (Hh) signaling is essential for embryonic development and adult homeostasis. How its signaling activity is fine-tuned in response to fluctuated Hh gradient is less known. Here, we identify protein phosphatase V (PpV), the catalytic subunit of protein phosphatase 6, as a homeostatic regulator of Hh signaling. PpV is genetically upstream of widerborst (wdb), which encodes a regulatory subunit of PP2A that modulates high-level Hh signaling. We show that PpV negatively regulates Wdb stability independent of phosphatase activity of PpV, by competing with the catalytic subunit of PP2A for Wdb association, leading to Wdb ubiquitination and subsequent proteasomal degradation. Thus, regulated Wdb stability, maintained through competition between two closely related phosphatases, ensures graded Hh signaling. Interestingly, PpV expression is regulated by Hh signaling. Therefore, PpV functions as a Hh activity sensor that regulates Wdb-mediated PP2A activity through feedback mechanisms to maintain Hh signaling homeostasis.