The Drosophila guanine nucleotide exchange factor Pebble (Pbl) is essential for cytokinesis and cell migration during gastrulation. In dividing cells, Pbl promotes Rho1 activation at the cell cortex, leading to formation of the contractile actin-myosin ring. The role of Pbl in fibroblast growth factor-triggered mesoderm spreading during gastrulation is less well understood and its targets and subcellular localization are unknown. To address these issues we performed a domain-function study in the embryo. We show that Pbl is localized to the nucleus and the cell cortex in migrating mesoderm cells and found that, in addition to the PH domain, the conserved C-terminal tail of the protein is crucial for cortical localization. Moreover, we show that the Rac pathway plays an essential role during mesoderm migration. Genetic and biochemical interactions indicate that during mesoderm migration, Pbl functions by activating a Rac-dependent pathway. Furthermore, gain-of-function and rescue experiments suggest an important regulatory role of the C-terminal tail of Pbl for the selective activation of Rho1-versus Rac-dependent pathways.