The pannier (pnr) gene of Drosophila encodes a zinc-finger transcription factor of the GATA family and is involved in several developmental processes during embryonic and imaginal development. We report some novel aspects of the regulation and function of pnr during embryogenesis. Previous work has shown that pnr is activated by decapentaplegic (dpp) in early development, but we find that after stage 10, the roles are reversed and pnr becomes an upstream regulator of dpp. This function of pnr is necessary for the activation of the Dpp pathway in the epidermal cells implicated in dorsal closure and is not mediated by the JNK pathway, which is also necessary for Dpp activity in these cells. In addition, we show that pnr behaves as a selector-like gene in generating morphological diversity in the dorsoventral body axis. It is responsible for maintaining a subdivision of the dorsal half of the embryo into two distinct, dorsomedial and dorsolateral, regions, and also specifies the identity of the dorsomedial region. These results, together with prior work on its function in adults, suggest that pnr is a major factor in the genetic subdivision of the body of Drosophila.