Axial patterning of the embryonic brain requires a precise balance between canonical Wnt signaling, which dorsalizes the nervous system, and Sonic hedgehog (Shh), which ventralizes it. The ventral anterior homeobox (Vax) transcription factors are induced by Shh and ventralize the forebrain through a mechanism that is poorly understood. We therefore sought to delineate direct Vax target genes. Among these, we identify an extraordinarily conserved intronic region within the gene encoding Tcf7l2, a key mediator of canonical Wnt signaling. This region functions as a Vax2-activated internal promoter that drives the expression of dnTcf7l2, a truncated Tcf7l2 isoform that cannot bind β-catenin and that therefore acts as a potent dominant-negative Wnt antagonist. Vax2 concomitantly activates the expression of additional Wnt antagonists that cooperate with dnTcf7l2. Specific elimination of dnTcf7l2 in Xenopus results in headless embryos, a phenotype consistent with a fundamental role for this regulator in forebrain development.