The contribution of the tumor microenvironment to pancreatic ductal adenocarcinoma (PDAC) development is currently unclear. We therefore examined the consequences of disrupting paracrine Hedgehog (HH) signaling in PDAC stroma. Herein, we show that ablation of the key HH signaling gene Smoothened (Smo) in stromal fibroblasts led to increased proliferation of pancreatic tumor cells. Furthermore, Smo deletion resulted in proteasomal degradation of the tumor suppressor PTEN and activation of oncogenic protein kinase B (AKT) in fibroblasts. An unbiased proteomic screen identified RNF5 as a novel E3 ubiquitin ligase responsible for degradation of phosphatase and tensin homolog (PTEN) in Smo-null fibroblasts. Ring Finger Protein 5 (Rnf5) knockdown or pharmacological inhibition of glycogen synthase kinase 3β (GSKβ), the kinase that marks PTEN for ubiquitination, rescued PTEN levels and reversed the oncogenic phenotype, identifying a new node of PTEN regulation. In PDAC patients, low stromal PTEN correlated with reduced overall survival. Mechanistically, PTEN loss decreased hydraulic permeability of the extracellular matrix, which was reversed by hyaluronidase treatment. These results define non-cell autonomous tumor-promoting mechanisms activated by disruption of the HH/PTEN axis and identifies new targets for restoring stromal tumor-suppressive functions.