The Dorsal morphogen directs formation of the Drosophila dorsoventral axis by both activating and repressing transcription. It contains an N-terminal Rel homology domain (RHD), which is responsible for DNA binding and regulated nuclear import, and a C-terminal domain (CTD) that contains activation and repression motifs. To determine if the RHD has a direct role in transcriptional control, we analyzed a series of RHD mutations in S2 cells and embryos. Two classes of mutations (termed class I and class II mutations) that alter activation without affecting DNA binding or nuclear import were identified. The two classes appear to define distinct protein interaction surfaces on opposite faces of the RHD. Class I mutations enhance an apparently inhibitory interaction between the RHD and the CTD and eliminate both activation and repression by Dorsal. In contrast, class II mutations result in increased activation in S2 cells but severely decreased activation in embryos and have little effect on repression. Analysis of the cuticles of class II mutant embryos suggests that, in the absence of Dorsal-mediated activation, Dorsal-mediated repression is not sufficient to pattern the embryo. These results provide some of the first evidence that the RHD plays an active role in transcriptional regulation in intact multicellular organisms.