Wingless (Wg) is an important signaling molecule in the development of Drosophila, but little is known about its signal transduction pathway. Genetic evidence indicates that another segment polarity gene, dishevelled (dsh) is required for Wg signaling. We have recently developed a cell culture system for Wg protein activity, and using this in vitro system as well as intact Drosophila embryos, we have analyzed biochemical changes in the Dsh protein as a consequence of Wg signaling. We find that Dsh is a phosphoprotein, normally present in the cytoplasm. Wg signaling generates a hyperphosphorylated form of Dsh, which is associated with a membrane fraction. Overexpressed Dsh becomes hyperphosphorylated in the absence of extracellular Wg and increases levels of the Armadillo protein, thereby mimicking the Wg signal. A deletional analysis of Dsh identifies several conserved domains essential for activity, among which is a so-called GLGF/DHR motif. We conclude that dsh, a highly conserved gene, is not merely a permissive factor in Wg signaling but encodes a novel signal transduction molecule, which may function between the Wg receptor and more downstream signaling molecules.