Mutations in the adenomatous polyposis coli (APC) tumor suppressor gene are linked to both familial and sporadic human colon cancer. So far, a clear biological function for the APC gene product has not been determined. We assayed the activity of APC in the early Xenopus embryo, which has been established as a good model for the analysis of the signaling activity of the APC-associated protein beta-catenin. When expressed in the future ventral side of a four-cell embryo, full-length APC induced a secondary dorsoanterior axis and the induction of the homeobox gene Siamois. This is similar to the phenotype previously observed for ectopic beta-catenin expression. In fact, axis induction by APC required the availability of cytosolic beta-catenin. These results indicate that APC has signaling activity in the early Xenopus embryo. Signaling activity resides in the central domain of the protein, a part of the molecule that is missing in most of the truncating APC mutations in colon cancer. Signaling by APC in Xenopus embryos is not accompanied by detectable changes in expression levels of beta-catenin, indicating that it has direct positive signaling activity in addition to its role in beta-catenin turnover. From these results we propose a model in which APC acts as part of the Wnt/beta-catenin signaling pathway, either upstream of, or in conjunction with, beta-catenin.