During animal development, cells have to respond appropriately to localized secreted signals. Proper responses to Hedgehog, transforming growth factor-beta, epidermal growth factor and fibroblast growth factor/Ras signals require cognate inducible antagonists such as Patched, Dad, Argos and Sprouty. Wnt signals are crucial in development and neoplasia. Here we show that naked cuticle (nkd), a Drosophila segment-polarity gene, encodes an inducible antagonist for the Wnt signal Wingless (Wg). In fly embryos and imaginal discs nkd transcription is induced by Wg. In embryos, decreased nkd function has an effect similar to excess Wg; at later stages such a decrease appears to have no effect. Conversely, overproduction of Nkd in Drosophila and misexpression of Nkd in the vertebrate Xenopus laevis result in phenotypes resembling those of loss of Wg/Wnt function. nkd encodes a protein with a single EF hand (a calcium-binding motif) that is most similar to the recoverin family of myristoyl switch proteins. Nkd may therefore link ion fluxes to the regulation of the potency, duration or distribution of Wnt signals. Signal-inducible feedback antagonists such as nkd may limit the effects of Wnt proteins in development and disease.