Homeodomain (HD) transcriptional activities are tightly regulated during embryogenesis and require protein interactions for their spatial and temporal activation. The chromatin-associated high mobility group protein (HMG-17) is associated with transcriptionally active chromatin, however its role in regulating gene expression is unclear. This report reveals a unique strategy in which, HMG-17 acts as a molecular switch regulating HD transcriptional activity. The switch utilizes the Wnt/beta-catenin signaling pathway and adds to the diverse functions of beta-catenin. A high-affinity HMG-17 interaction with the PITX2 HD protein inhibits PITX2 DNA-binding activity. The HMG-17/PITX2 inactive complex is concentrated to specific nuclear regions primed for active transcription. beta-Catenin forms a ternary complex with PITX2/HMG-17 to switch it from a repressor to an activator complex. Without beta-catenin, HMG-17 can physically remove PITX2 from DNA to inhibit its transcriptional activity. The PITX2/HMG-17 regulatory complex acts independently of promoter targets and is a general mechanism for the control of HD transcriptional activity. HMG-17 is developmentally regulated and its unique role during embryogenesis is revealed by the early embryonic lethality of HMG-17 homozygous mice. This mechanism provides a new role for canonical Wnt/beta-catenin signaling in regulating HD transcriptional activity during development using HMG-17 as a molecular switch.