The Wingless (Wg)/Wnt signaling pathway is highly conserved throughout many multicellular organisms. It directs the development of diverse tissues and organs by regulating important processes such as proliferation, polarity and the specification of cell fates. Upon activation of the Wg/Wnt signaling pathway, Armadillo (Arm)/beta-catenin is stabilized and interacts with the TCF family of transcription factors, which in turn activate Wnt target genes. We show here that Arm interacts with a novel BED (BEAF and Dref) finger protein that we have termed Sunspot (Ssp). Ssp transactivates Drosophila E2F-1 (dE2F-1) and PCNA expression, and positively regulates the proliferation of imaginal disc cells and the endoreplication of salivary gland cells. Wg negatively regulates the function of Ssp by changing its subcellular localization in the salivary gland. In addition, Ssp was found not to be involved in the signaling pathway mediated by Arm associated with dTCF. Our findings indicate that Arm controls development in part by regulating the function of Ssp.