Tumor cells expressing programmed cell death ligand 1 (PD-L1) interact with PD-1 on CD8+ cytotoxic T lymphocytes (CTLs) to inhibit CTL effector function. In gastric cancer, the mechanism regulating PD-L1 is unclear. The Hedgehog (Hh) signaling pathway is reactivated in various cancers including gastric. Here we tested the hypothesis that Hh-induced PD-L1 inactivates effector T cell function and allows gastric cancer cell proliferation. Mouse organoids were generated from tumors of a triple-transgenic mouse model engineered to express an activated GLI2 allele, GLI2A, in Lgr5-expressing stem cells, (mTGOs) or normal mouse stomachs (mGOs). Bone marrow-derived dendritic cells (DCs) were pulsed with conditioned media collected from normal (mGOCM) or cancer (mTGOCM) organoids. Pulsed DCs and CTLs were then co-cultured with either mGOs or mTGOs in the presence of PD-L1 neutralizing antibody (PD-L1Ab). Human-derived gastric cancer organoids (huTGOs) were used in drug and xenograft assays. Hh/Gli inhibitor, GANT-61 significantly reduced the expression of PD-L1 and tumor cell proliferation both in vivo and in vitro. PD-L1Ab treatment induced tumor cell apoptosis in mTGO/immune cell co-cultures. GANT-61 treatment sensitized huTGOs to standard-of-care chemotherapeutic drugs both in vivo and in vitro. Thus, Hh signaling mediates PD-L1 expression in gastric cancer cells and subsequently promotes tumor proliferation.