Tcf3 acts as a transcription factor controlling gene expression in canonical Wnt signaling. In this study we show that mouse Tcf3 represses canonical Wnt signaling in mouse neural stem cells and in human HEK 293 cells. We demonstrate that mouse Tcf3 mediates repression of both moderate and high levels of canonical Wnt signaling, by either competing with other members of the Tcf/Lef family for binding to β-catenin, or for binding to DNA. We observed that the repressor activity of mouse Tcf3 was only relieved effectively upon simultaneous disruption of both mechanisms. Immunofluorescence of transfected HEK 293 cells showed co-localization of β-catenin and Tcf3 in the nucleus of cells transfected with full-length Tcf3, but not in cells transfected with N-terminal deleted versions. A direct physical interaction between β-catenin and Tcf3 in the nucleus was confirmed by co-immunoprecipitation studies. The inhibitory β-catenin/Tcf3 interface was independent of the ability of Tcf3 to directly interact with DNA.