Goosecoid (Gsc) is a homeodomain protein expressed in the organizer region of vertebrate embryos. Its Drosophila homologue, D-Gsc, has been implicated in the formation of the Stomatogastric Nervous System. Although there are no apparent similarities between the phenotypes of mutations in the gsc gene in flies and mice, all known Gsc proteins can rescue dorsoanterior structures in ventralized Xenopus embryos. We describe how D-Gsc behaves as a transcriptional repressor in Drosophila cells, acting through specific palindromic HD binding sites (P3K). D-Gsc is a 'passive repressor' of activator homeoproteins binding to the same sites and an 'active repressor' of activators binding to distinct sites. In addition, D-Gsc is able to strongly repress transcription activated by Paired-class homeoproteins through P3K, via specific protein-protein interactions in what we define as 'interactive repression'. This form of repression requires the short conserved GEH/eh-1 domain, also present in the Engrailed repressor. Although the GEH/eh-1 domain is necessary for rescue of UV-ventralized Xenopus embryos, it is dispensable for ectopic induction of Xlim-1 expression, demonstrating that this domain is not required for all Gsc functions in vivo. Interactive repression may represent specific interactions among Prd-class homeoproteins, several of which act early during development of invertebrate and vertebrate embryos.