Dorsoventral polarity in the Drosophila embryo is established by a signaling pathway active on the ventral and ventrolateral surfaces of the embryo. Signal transduction via the protein kinase Pelle frees the Rel-related protein Dorsal from its cytoplasmic inhibitor Cactus, allowing Dorsal to translocate into ventral and ventrolateral nuclei and direct gene expression. Here, we show by immunochemical analyses that Pelle-mediated signaling induces the spatially graded degradation of Cactus. Using a tissue culture system which reconstitutes Pelle-dependent Cactus degradation, we show that a motif in Cactus resembling the sites of signal-dependent phosphorylation in the vertebrate homologs IkappaB-alpha and IkappaB-beta is essential for Pelle-induced Cactus degradation. Substitution of four serines within this motif with nonphosphorylatable alanine residues generated a mutant Cactus that still functions as a Dorsal inhibitor but is resistant to induced degradation. Injection of RNA encoding this altered form of Cactus has a dominant negative effect on establishment of dorsoventral polarity in the embryo. We conclude that dorsoventral signaling results in a Cactus concentration gradient and propose that signal-dependent phosphorylation directs the spatially regulated proteolysis of Cactus protein.