Wnt growth factors mediate cell fate determination during embryogenesis and in the renewal of tissues in the adult. Wnts act by stabilizing cellular levels of the transcriptional coactivator β-catenin, which forms complexes with sequence-specific DNA-binding Tcf/Lef transcription factors. In the absence of nuclear β-catenin, Tcf/Lefs act as transcriptional repressors by binding to Groucho/TLE proteins. The molecular basis of the switch from transcriptional repression to activation during Wnt signaling has not been clear, in particular whether factors other than β-catenin are required to disrupt the interaction between Groucho/TLE and Tcf/Lef. Using highly purified proteins, we demonstrate that β-catenin displaces Groucho/TLE from Tcf/Lef by binding to a previously unidentified second, low-affinity binding site on Lef-1 that includes sequences just N-terminal to the DNA-binding domain, and that overlaps the Groucho/TLE-binding site.