Xenopus Nodal-related (Xnr) 5 is one of the earliest expressed components of a network of TGF-beta factors participating in endoderm and mesoderm formation. Zygotic gene expression is not required for induction of Xnr5; rather, expression is dependent on the maternal factors VegT, localised throughout the vegetal pole, and beta-catenin, functional in the future dorsal region of the embryo. Using transient assays with a luciferase reporter in Xenopus embryos, we have defined a minimal promoter, which mimics the response of the endogenous gene to applied factors. Expression of luciferase from the minimal promoter is dorsal-specific and requires two T-box half sites and a functional beta-catenin/XTcf-3 pathway. Mutation of two Tcf/Lef sites in the minimal promoter permits induction by VegT to wild-type promoter levels in the presence of a dominant-negative XTcf-3, indicating that beta-catenin/XTcf-3 are repressive and are not required as transactivators of Xnr5 transcription. The activity of the Tcf/Lef mutant promoter is similar in both ventral and dorsal sides of the embryo. In transgenic experiments, the dorsal specificity of expression of a beta-gal reporter driven by the wild-type minimal promoter is abolished upon mutation of these Tcf/Lef sites. We propose a model in which XTcf-3 functions as a repressor of Xnr5 throughout the blastula embryo, except where repression is lifted by the binding of beta-catenin in the dorsal region. This removal of repression allows activation of the promoter by VegT in the dorsal vegetal region. Subsequently, zygotically expressed LEF1 supersedes the role of beta-catenin/XTcf-3.