Transcriptional control of the Drosophila terminal gap gene huckebein (hkb) depends on Torso (Tor) receptor tyrosine kinase (RTK) signaling and the Rel/NFkappaB homolog Dorsal (DI). DI acts as an intrinsic transcriptional activator in the ventral region of the embryo, but under certain conditions, such as when it is associated with the non-DNA-binding co-repressor Groucho (Gro), it is converted into a repressor. Gro is recruited to the enhancer element in the vicinity of DI by sequence-specific transcription factors such as Dead Ringer (Dri). We examined the interplay between DI, Gro and Dri on the hkb enhancer and show that when acting over a distance, Gro abolishes rather than converts DI activator function. Reducing the distance between DI- and Dri-binding sites, however, switches DI into a Gro-dependent repressor that overrides activation of transcription. Both of the distance-dependent regulatory options of Gro - quenching and silencing of transcription - are inhibited by RTK signaling. These data describe a newly identified mode of function for Gro when acting in concert with DI. RTK signaling provides a way of modulating DI function by interfering either with Gro activity or with Dri-dependent recruitment of Gro to the enhancer.