Wnt/beta-catenin signals orchestrate cell fate and behavior throughout the animal kingdom. Aberrant Wnt signaling impacts nearly the entire spectrum of human disease, including birth defects, cancer, and osteoporosis. If Wnt signaling is to be effectively manipulated for therapeutic advantage, we first must understand how Wnt signals are normally controlled. Naked cuticle (Nkd) is a novel and evolutionarily conserved inducible antagonist of Wnt/beta-catenin signaling that is crucial for segmentation in the model genetic organism, the fruit fly Drosophila melanogaster. Nkd can bind and inhibit the Wnt signal transducer Dishevelled (Dsh), but the mechanism by which Nkd limits Wnt signaling in the fly embryo is not understood. Here we show that nkd mutants exhibit elevated levels of the beta-catenin homolog Armadillo but no alteration in Dsh abundance or distribution. In the fly embryo, Nkd and Dsh are predominantly cytoplasmic, although a recent report suggests that vertebrate Dsh requires nuclear localization for activity in gain-of-function assays. While Dsh-binding regions of Nkd contribute to its activity, we identify a conserved 30-amino-acid motif, separable from Dsh-binding regions, that is essential for Nkd function and nuclear localization. Replacement of the 30-aa motif with a conventional nuclear localization sequence rescued a small fraction of nkd mutant animals to adulthood. Our studies suggest that Nkd targets Dsh-dependent signal transduction steps in both cytoplasmic and nuclear compartments of cells receiving the Wnt signal.