Both transcriptional activation and repression have essential functions in maintaining proper spatial and temporal control of gene expression. Although Wnt signalling is often associated with gene activation, we have identified several directly repressed targets of Wnt signalling in Drosophila. Here, we explore how individual Wnt target genes are specified for signal-induced activation or repression. Similar to activation, repression required binding of Armadillo (Arm) to the N terminus of TCF. However, TCF/Arm mediated repression by binding to DNA motifs that are markedly different from typical TCF-binding sites. Conversion of the novel motifs to standard TCF-binding sites reversed the mode of regulation, resulting in Wnt-mediated activation instead of repression. A mutant form of Arm defective in activation was still functional for repression, indicating that distinct domains of the protein are required for each activity. This study suggests that the sequence of TCF-binding sites allosterically regulates the TCF/Arm complex to effect either transcriptional activation or repression.