A hallmark of mature skeletal muscles is the presence of multinucleate muscle fibers. In Drosophila, the formation of muscle syncytia requires the cooperative participation of two types of myoblasts, founder cells and fusion-competent myoblasts. We show that a newly identified gene, lame duck (lmd), has an essential regulatory role in the specification and function of fusion-competent myoblasts. Embryos that lack lmd function show a loss of expression of two key differentiation and fusion genes, Mef2 and sticks-and-stones, in fusion-competent myoblasts and are completely devoid of multinucleate muscle fibers. By contrast, founder cells are specified and retain their capability to differentiate into mononucleate muscle cells. lmd encodes a novel member of the Gli superfamily of transcription factors and is expressed in fusion-competent myoblasts and their precursors in a Wingless- and Notch-dependent manner. The activity of the Lmd protein appears to be additionally controlled by its differential cytoplasmic versus nuclear localization. Results from an independent molecular screen for binding factors to a myoblast-specific Mef2 enhancer further demonstrate that Lmd is a direct transcriptional regulator of Mef2 in fusion-competent myoblasts.