The evolutionarily conserved Wnt/ß-catenin (Wnt/ß-cat) pathway plays an important role in animal development in metazoans. Many Wnt targets are regulated by members of the TCF/LEF1 (TCF) family of transcription factors. All TCFs contain a High Mobility Group (HMG) domain that bind specific DNA sequences. Invertebrate TCFs and some vertebrate TCF isoforms also contain another domain, called the C-clamp, which allows TCFs to recognize an additional DNA motif known as the Helper site. While the C-clamp has been shown to be important for regulating several Wnt reporter genes in cell culture, its physiological role in regulating Wnt targets is less clear. In addition, little is known about this domain, except that two of the four conserved cysteines are functionally important. Here, we carried out a systematic mutagenesis and functional analysis of the C-clamp from the Drosophila TCF/Pangolin (TCF/Pan) protein. We found that the C-clamp is a zinc-binding domain that is sufficient for binding to the Helper site. In addition to this DNA-binding activity, the C-clamp also inhibits the HMG domain from binding its cognate DNA site. Point mutations were identified that specifically affected DNA-binding or reduced the inhibitory effect. These mutants were characterized in TCF/Pan rescue assays. The specific DNA-binding activity of the C-clamp was essential for TCF/Pan function in cell culture and in patterning the embryonic epidermis of Drosophila, demonstrating the importance of this C-clamp activity in regulating Wnt target gene expression. In contrast, the inhibitory mutation had a subtle effect in cell culture and no effect on TCF/Pan activity in embryos. These results provide important information about the functional domains of the C-clamp, and highlight its importance for Wnt/ß-cat signaling in Drosophila.