Wnt target gene transcription is mediated by nuclear translocation of stabilized beta-catenin, which binds to TCF and recruits Pygopus, a cofactor with an unknown mechanism of action. The mediator complex is essential for the transcription of RNA polymerase II-dependent genes; it associates with an accessory subcomplex consisting of the Med12, Med13, Cdk8, and Cyclin C subunits. We show here that the Med12 and Med13 subunits of the Drosophila mediator complex, encoded by kohtalo and skuld, are essential for the transcription of Wingless target genes. kohtalo and skuld act downstream of beta-catenin stabilization both in vivo and in cell culture. They are required for transcriptional activation by the N-terminal domain of Pygopus, and their physical interaction with Pygopus depends on this domain. We propose that Pygopus promotes Wnt target gene transcription by recruiting the mediator complex through interactions with Med12 and Med13.