hairy is a Drosophila pair-rule segmentation gene that functions genetically as a repressor. To isolate protein components of Hairy-mediated repression, we used a yeast interaction screen and identified a Hairy-interacting protein, the Drosophila homolog of the human C-terminal-binding protein (CtBP). Human CtBP is a cellular phosphoprotein that interacts with the C-terminus of the adenovirus E1a oncoprotein and functions as a tumor suppressor. dCtBP also interacts with E1a in a directed yeast two-hybrid assay. We show that dCtBP interacts specifically and directly with a small, previously uncharacterized C-terminal region of Hairy. dCtBP activity appears to be specific to Hairy of the Hairy/Enhancer of split [E(spl)]/Dpn basic helix-loop-helix protein class. We identified a P-element insertion within the dCtBP transcription unit that fails to complement alleles of a known locus, l(3)87De. We demonstrate that dCtBP is essential for proper embryonic segmentation by analyzing embryos lacking maternal dCtBP activity. While Hairy is probably not the only segmentation gene interacting with dCtBP, we show dose-sensitive genetic interactions between dCtBP and hairy mutations.