During development, extracellular signals often act at multiple thresholds to specify distinct transcriptional and cellular responses. For example, in the embryonic midgut of Drosophila, low Wingless levels stimulate the transcription of homeotic genes whereas high Wingless levels repress these genes. Wingless- mediated transcriptional activation is conferred by Drosophila: T-cell factor (dTCF) and its co-activator Armadillo, but the nuclear factors mediating transcriptional repression are unknown. Here we show that teashirt is required for Wingless-mediated repression of Ultrabithorax: in the midgut. Teashirt is also a repressor of the homeotic gene labial in this tissue. Furthermore, the target sequence for Tsh within the Ultrabithorax: midgut enhancer coincides with the response sequence for Wingless-mediated repression. Finally, we demonstrate that the zinc finger protein Teashirt behaves as a transcriptional repressor in transfected mammalian cells. It thus appears that the response to high Wingless levels in the Drosophila: midgut is indirect and based on transcriptional activation of the Teashirt repressor.