Caudalizing factors operate in the context of Wnt/beta-catenin signaling to induce gene expression in discrete compartments along the rostral-caudal axis of the developing vertebrate nervous system. In zebrafish, basal repression of caudal genes is achieved through the function of Headless (Hdl), a Tcf3 homolog. In this study, we show that a second Tcf3 homolog, Tcf3b, limits caudalization caused by loss of Hdl function and although this Lef/Tcf family member can rescue hdl mutants, Lef1 cannot. Wnts can antagonize repression mediated by Tcf3 and this derepression is dependent on a Tcf3 beta-catenin binding domain. Systematic changes in gene expression caused by reduced Tcf3 function help predict the shape of a caudalizing activity gradient that defines compartments along the rostral-caudal axis. In addition, Tcf3b has a second and unique role in the morphogenesis of rhombomere boundaries, indicating that it controls multiple aspects of brain development.