XTcf-3 is a maternally expressed Xenopus homolog of the mammalian HMG box factors Tcf-1 and Lef-1. The N-terminus of XTcf-3 binds to β-catenin. Microinjection of XTcf-3 mRNA in embryos results in nuclear translocation of β-catenin. The β-catenin–XTcf-3 complex activates transcription in a transient reporter gene assay, while XTcf-3 by itself is silent. N-terminal deletion of XTcf-3 (ΔN) abrogates the interaction with β-catenin, as well as the consequent transcription activation. This dominant-negative ΔN mutant suppresses the induction of axis duplication by microinjected β-catenin. It also suppresses endogenous axis specification upon injection into the dorsal blastomeres of a 4-cell-stage embryo. We propose that signaling by β-catenin involves complex formation with XTcf-3, followed by nuclear translocation and activation of specific XTcf-3 target genes.