Formation of the vertebrate body plan is controlled by discrete head and trunk organizers that establish the anteroposterior pattern of the body axis. The Goosecoid (Gsc) homeodomain protein is expressed in all vertebrate organizers and has been implicated in the activity of Spemann's organizer in Xenopus. The role of Gsc in organizer function was examined by fusing defined transcriptional regulatory domains to the Gsc homeodomain. Like native Gsc, ventral injection of an Engrailed repressor fusion (Eng-Gsc) induced a partial axis, while a VP16 activator fusion (VP16-Gsc) did not, indicating that Gsc functions as a transcriptional repressor in axis induction. Dorsal injection of VP16-Gsc resulted in loss of head structures anterior to the hindbrain, while axial structures were unaffected, suggesting a requirement for Gsc function in head formation. The anterior truncation caused by VP16-Gsc was fully rescued by Frzb, a secreted Wnt inhibitor, indicating that activation of ectopic Wnt signaling was responsible, at least in part, for the anterior defects. Supporting this idea, Xwnt8 expression was activated by VP16-Gsc in animal explants and the dorsal marginal zone, and repressed by Gsc in Activin-treated animal explants and the ventral marginal zone. Furthermore, expression of Gsc throughout the marginal zone inhibited trunk formation, identical to the effects of Frzb and other Xwnt8 inhibitors. A region of the Xwnt8 promoter containing four consensus homeodomain-binding sites was identified and this region mediated repression by Gsc and activation by VP16-Gsc, consistent with direct transcriptional regulation of Xwnt8 by Gsc. Therefore, Gsc promotes head organizer activity by direct repression of Xwnt8 in Spemann's organizer and this activity is essential for anterior development.