Cholestasis is a significant risk factor for immediate hepatic failure due to ischemia reperfusion (I/R) injury in patients undergoing liver surgery or transplantation. We recently demonstrated that inhibition of Hedgehog (Hh) signaling with cyclopamine (CYA) before I/R prevents liver injury. In this study we hypothesized that Hh signaling may modulate I/R injury in cholestatic rat liver. Cholestasis was induced by bile duct ligation (BDL). Seven days after BDL, rats were exposed to either CYA or vehicle for 7 days daily before being subjected to 30 min of ischemia and 4 h of reperfusion. Expression of Hh ligands (Sonic Hedgehog, Patched-1 and Glioblastoma-1), assessment of liver injury, neutrophil infiltration, cytokines, lipid peroxidation, cell proliferation and apoptosis were determined. Significant upregulation of Hh ligands was seen in vehicle treated BDL rats. I/R injury superimposed on these animals resulted in markedly elevated serum alanine transaminase (ALT), aspartate transaminase (AST), total bilirubin accompanied with increased neutrophil recruitment and lipid peroxidation. Preconditioning with CYA reduced the histological damage and serum liver injury markers. CYA also reduced neutrophil infiltration, proinflammatory cytokines such as TNF-α and IL-1β expression of α-smooth muscle actin and type 1 collagen resulting in reduced fibrosis. Furthermore CYA treated animals showed reduced cholangiocyte proliferation, and apoptosis. Hepatoprotection by CYA was conferred by reduced activation of protein kinase B (Akt) and extracellular signal regulated kinase (ERK). Endogenous Hh signaling in cholestasis exacerbates inflammatory injury during liver I/R. Blockade of Hh pathway represents a clinically relevant novel approach to limit I/R injury in cholestatic marginal liver.