Inappropriate activation of downstream target genes by the oncoprotein beta-catenin is implicated in development of numerous human cancers(1,2). beta-catenin and its fruitfly counterpart Armadillo act as a coactivator in the canonical Wnt/Wingless pathway by binding to Tcf/Lef transcription factors(3-6). Here we report a conserved nuclear protein, named Chibby, which was identified in a screen for proteins that directly interact with the C-terminal region of beta-catenin. In mammalian cultured cells we demonstrate that Chibby inhibits beta-catenin-mediated transcriptional activation by competing with Lef-1 to bind to beta-catenin. Inhibition of Drosophila Chibby by RNA interference results in segment polarity defects that mimick a wingless gain-of-function phenotype, and overexpression of the wingless target genes engrailed and Ultrabithorax. In addition, epistasis experiments indicate that chibby acts downstream of wingless and upstream of armadillo.