Inappropriate activation of downstream target genes by the oncoprotein β-catenin is implicated in development of numerous human cancers. β-catenin and its fruitfly counterpart Armadillo act as a coactivator in the canonical Wnt/Wingless pathway by binding to Tcf/Lef transcription factors. 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 β-catenin. In mammalian cultured cells we demonstrate that Chibby inhibits β-catenin-mediated transcriptional activation by competing with Lef-1 to bind to β-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.