β-Catenin, apart from playing a cell-adhesive role, is a key nuclear effector of Wnt signaling. Based on activity assays in Drosophila, we generated mouse strains where the endogenous β-catenin protein is replaced by mutant forms, which retain the cell adhesion function but lack either or both of the N- and the C-terminal transcriptional outputs. The C-terminal activity is essential for mesoderm formation and proper gastrulation, whereas N-terminal outputs are required later during embryonic development. By combining the double-mutant β-catenin with a conditional null allele and a Wnt1-Cre driver, we probed the role of Wnt/β-catenin signaling in dorsal neural tube development. While loss of β-catenin protein in the neural tube results in severe cell adhesion defects, the morphology of cells and tissues expressing the double-mutant form is normal. Surprisingly, Wnt/β-catenin signaling activity only moderately regulates cell proliferation, but is crucial for maintaining neural progenitor identity and for neuronal differentiation in the dorsal spinal cord. Our model animals thus allow dissecting signaling and structural functions of β-catenin in vivo and provide the first genetic tool to generate cells and tissues that entirely and exclusively lack canonical Wnt pathway activity.