FoxD3 is a forkhead-related transcriptional regulator that is essential for multiple developmental processes in the vertebrate embryo, including neural crest development and maintenance of mammalian stem cell lineages. Recent results demonstrate a requirement for FoxD3 in Xenopus mesodermal development. In the gastrula, FoxD3 functions as a transcriptional repressor in the Spemann organizer to maintain the expression of Nodal-related members of the transforming growth factor-beta superfamily that induce dorsal mesoderm formation. Here we report that the function of FoxD3 in mesoderm induction is dependent on the recruitment of transcriptional corepressors of the TLE/Groucho family. Structure-function analyses indicate that the transcriptional repression and mesoderm induction activities of FoxD3 are dependent on a C-terminal domain, as well as specific DNA-binding activity conferred by the forkhead domain. The C-terminal domain contains a heptapeptide similar to the eh1/GEH Groucho interaction motif. Deletion and point mutagenesis demonstrated that the FoxD3 eh1/GEH motif is required for both repression of transcription and induction of mesoderm, as well as the direct physical interaction of FoxD3 and Grg4 (Groucho-related gene-4). Consistent with a functional interaction of FoxD3 and Grg4, the transcriptional repression activity of FoxD3 is enhanced by Grg4, and reduced by Grg5, a dominant inhibitory Groucho protein. The results indicate that FoxD3 recruitment of Groucho corepressors is essential for the transcriptional repression of target genes and induction of mesoderm in Xenopus.