Vertebrate beta-catenin and Drosophila Armadillo share structural similarities suggesting that beta-catenin, like Armadillo, has a developmental signaling function. Both proteins are present as components of cell adherens junctions, but accumulate in the cytoplasm upon Wingless/Wnt signaling. beta-Catenin has axis-inducing properties like Wnt when injected into Xenopus blastomeres, providing evidence for participation of beta-catenin in the Wnt-pathway, but until now no downstream targets for beta-catenin have been identified. Here we demonstrate that beta-catenin binds to the HMG-type transcription factor lymphoid enhancer factor-1 (LEF-1), resulting in a nuclear translocation of beta-catenin both in cultured mouse cells and after ectopic expression of LEF-1 in two-cell mouse embryos. LEF-1/beta-catenin complexes bind to the promoter region of the E-cadherin gene in vitro, suggesting that this interaction could regulate E-cadherin transcription. As shown for beta-catenin, ectopic expression of LEF-1 in Xenopus embryos caused duplication of the body axis, indicating a regulatory role for a LEF-1-like molecule in dorsal mesoderm formation.