During germ-band extension in the Drosophila embryo, intercellular communication is required to maintain gene expression patterns initiated at cellular blastoderm. For example, the wingless (wg) single-cell-wide stripe in each parasegment (PS) is dependent on a signal from the adjacent, posterior cells, which express engrailed (eN). This signal is thought to be the hedgehog (hh) gene product, which antagonizes the activity of patched (ptc), a repressor of wg expression. Genetic evidence indicates that the hh signal is bidirectional, but wg transcription is only derepressed on the anterior side of the en/hh stripes. To explain the asymmetric response of the wg promoter to the hh signal, current models predict that each PS is divided into cells that are competent to express either wg or en, but not both. The sloppy paired (slp) locus contains two transcription units, both encoding proteins containing a forkhead domain, a DNA-binding motif. Removal of slp gene function causes embryos to exhibit a severe pair-rule/segment polarity phenotype. We show that the en stripes expand anteriorly in slp mutant embryos and that slp activity is an absolute requirement for maintenance of wg expression at the same time that wg transcription is dependent on hh. The slp proteins are expressed in broad stripes just anterior of the en-positive cells, overlapping the narrow wg stripes. We propose that by virtue of their ability to activate wg and repress en expression, the distribution of the slp proteins define the wg-competent and en-competent groups. Consistent with this hypothesis, ubiquitous expression of slp protein throughout the PS abolishes en expression and, in ptc mutant embryos, results in a near ubiquitous distribution of wg transcripts. In addition to demonstrating the role of slp in maintaining segment polarity, our results suggest that slp works in, or parallel with, the ptc/hh signal transduction pathway to regulate wg transcription.