Plakoglobin is one of two vertebrate proteins closely related to the Drosophila segment polarity gene product armadillo. Overexpression of plakoglobin induces neural axis duplication in Xenopus and the exogenous plakoglobin is localized to nuclei (Karnovsky, A., and Klymkowsky, M. W., Proc. Natl. Acad. Sci. USA 92, 4255, 1995; Rubenstein, A., et al., Dev. Genet., 1997, in press). We have carried out a series of experiments to test whether the nuclear localization of plakoglobin is required for its inductive effects. Prior to the midblastula transition exogenous plakoglobin is cytoplasmic and concentrated in the cortical regions of blastomeres; after the midblastula transition exogenous plakoglobin accumulates in embryonic nuclei. The addition of a "nuclear localization sequence" does not change the timing of plakoglobin's nuclear localization, suggesting that it is anchored in the cytoplasm prior to the midblastula transition. Next, we constructed two "membrane-anchored" forms of plakoglobin. These are exclusively cytoplasmic; yet both were as effective at producing a "Wnt-like" axis duplication as were "free," unfettered forms of plakoglobin. Moreover, expression of anchored plakoglobins had no apparent effect on the cytoplasmic or nuclear levels of beta-catenin. These data indicate that plakoglobin can act cytoplasmically to generate a WNT-like phenotype. Taken together with the ventralizing effects of a mutant from of the XTcf-3 transcription factor, described by Molenaar et al. Cell 86, 391, 1996, we speculate that in the early Xenopus embryo, activation of plakoglobin (or beta-catenin) inhibits the activity of XTcf-3 or a XTcf-3-like factor.