The polycistronic and non-canonical gene tarsal-less encodes several short peptides 11 to 32 aminoacids long. tarsal-less is required for embryonic and imaginal development in Drosophila, but the molecular and cellular bases of its function are not known. Here we show that tarsal-less function triggers a cell signal. This signal has a range of 2-3 cells in Drosophila legs and may be provided directly by the Tarsal-less peptides. During leg development, this Tarsal-less signal implements the patterning activity of a tarsal boundary and regulates the transcription of several genes in a specific manner. Thus tarsal-less is necessary for the intercalation of the tarsal segments two to four and for the activation of the homeobox gene apterous, the Zinc-finger gene rotund and the bHLH-PAS gene spineless, and for the repression of the homeobox gene Bar and the putative transcription factor dacshund. These regulatory effects complement the known genetic scenario required for distal leg development and explain the requirements for tarsal-less in this process.