The CBP protein is a transcriptional co-activator and histone acetyltransferase. Reduced expression of Drosophila CBP (dCBP) in the early embryo specifically impairs signaling by the TGF-beta molecules Dpp and Screw (Scw). This occurs by a failure to activate transcription of the tolloid (tld) gene, which codes for a protease that generates active Dpp and Scw ligands. We show that dCBP directly regulates this gene by binding to the tld enhancer, and that tld expression can be partially rescued with a dCBP transgene. At a slightly later stage of development, Dpp/Scw signaling recovers in mutant embryos, but is unable to turn on expression of the Dpp/Scw-target gene rhomboid (rho). Interestingly, an acetyltransferase (AT)-defective dCBP transgene rescued tld and rho gene expression to an extent comparable to the wild-type transgene, whereas a transgene containing a 130 amino acid deletion rescued tld but not late rho expression. A tracheal phenotype caused by the reduced dCBP levels was also rescued more efficiently with the wild-type dCBP transgene than with this mutant transgene. Our results indicate that separate parts of the dCBP protein are required on different promoters, and that the AT activity of dCBP is dispensable for certain aspects of Dpp signaling. We discuss the similarity of these results to the role of p300/CBP in TGF-beta signaling in the mouse.