Neural progenitor cells (NPCs) derived from human pluripotent stem cells(hPSCs) provide major cell sources for repairing damaged neural circuitry and enabling axonal regeneration after spinal cord injury (SCI). However, the injury niche and inadequate intrinsic factors in the adult spinal cord restrict the therapeutic potential of transplanted NPCs. The Sonic Hedgehog protein (Shh) has crucial roles in neurodevelopment by promoting the formation of motorneurons and oligodendrocytes as well as its recently described neuroprotective features in response to the injury, indicating its essential role in neural homeostasis and tissue repair. In this study, we demonstrate that elevated SHH signaling in hNPCs by inhibiting its negative regulator, SUFU, enhanced cell survival and promoted robust neuronal differentiation with extensive axonal outgrowth, counteracting the harmful effects of the injured niche. Importantly, SUFU inhibition in NPCs exert non-cell autonomous effects on promoting survival and neurogenesis of endogenous cells and modulating the microenvironment by reducing suppressive barriers around lesion sites. The combined beneficial effects of SUFU inhibition in hNPCs resulted in the effective reconstruction of neuronal connectivity with the host and corticospinal regeneration, significantly improving neurobehavioral recovery in recipient animals. These results demonstrate that SUFU inhibition confers hNPCs with potent therapeutic potential to overcome extrinsic and intrinsic barriers in transplantation treatments for SCI.