A key event in Wnt signaling is conversion of TCF/Lef from a transcriptional repressor to an activator, yet how this switch occurs is not well understood. Here, we report an unanticipated role for X-linked inhibitor of apoptosis (XIAP) in regulating this critical Wnt signaling event that is independent of its antiapoptotic function. We identified DIAP1 as a positive regulator of Wingless signaling in a Drosophila S2 cell-based RNAi screen. XIAP, its vertebrate homolog, is similarly required for Wnt signaling in cultured mammalian cells and in Xenopus embryos, indicating evolutionary conservation of function. Upon Wnt pathway activation, XIAP is recruited to TCF/Lef where it monoubiquitylates Groucho (Gro)/TLE. This modification decreases affinity of Gro/TLE for TCF/Lef. Our data reveal a transcriptional switch involving XIAP-mediated ubiquitylation of Gro/TLE that facilitates its removal from TCF/Lef, thus allowing β-catenin-TCF/Lef complex assembly and initiation of a Wnt-specific transcriptional program.