In a classical view of development, a cell can acquire positional information by reading the local concentration of a morphogen independently of its neighbors. Accordingly, in Drosophila, the morphogen Wingless produced in the wing's prospective distal region activates target genes in a dose-dependent fashion to organize the proximodistal pattern. Here, we show that, in parallel, Wingless triggers two nonautonomous inhibitory programs that play an important role in the establishment of positional information. Cells flanking the source of Wingless produce a negative signal (encoded by notum) that inhibits Wingless signaling in nearby cells. Additionally, in response to Wingless, all prospective wing cells produce an unidentified signal that dampens target gene expression in surrounding cells. Thus, cells influence each other's response to Wingless through at least two modes of lateral inhibition. Without lateral inhibition, some cells acquire ectopic fates. Lateral inhibition may be a general mechanism behind the interpretation of morphogen gradients.