Transcriptional control during early Drosophila development is governed by maternal and zygotic factors. We have identified a novel maternal transcriptional regulator gene, lilliputian (lilli), which contains an HMG1 (AT-hook) motif and a domain with similarity to the human fragile X mental retardation FMR2 protein and the AF4 proto-oncoprotein. Embryos lacking maternal lilli expression show specific defects in the establishment of a functional cytoskeleton during cellularization, and exhibit a pair-rule segmentation phenotype. These mutant phenotypes correlate with markedly reduced expression of the early zygotic genes serendipity alpha, fushi tarazu and huckebein, which are essential for cellularization and embryonic patterning. In addition, loss of lilli in adult photoreceptor and bristle cells results in a significant decrease in cell size. Our results indicate that lilli represents a novel pair-rule gene that acts in cytoskeleton regulation, segmentation and morphogenesis.