The Drosophila homeobox gene extradenticle (exd) encodes a highly conserved cofactor of Hox proteins. exd activity is regulated post-translationally by a mechanism involving nuclear translocation; only nuclear Exd protein is functional. The exd gene is required for patterning of the proximal region of the leg, whereas patterning of the distal region requires signalling by the Wingless (Wg) and Decapentaplegic (Dpp) proteins, which are in turn activated by Hedgehog (Hh). Here we show that exd function and Dpp/Wg signalling are antagonistic and divide the leg into two mutually exclusive domains. In the proximal domain, exd activity prevents cells from responding to Dpp and Wg. Conversely, in the distal domain, exd function is suppressed by the Dpp/Wg response gene Distal-less (Dll), which prevents the nuclear transport of Exd. We also found that the product of a murine homologue of exd (Pbx1) is regulated at the subcellular level, and that its pattern of nuclear localization in the mouse limb resembles that of Exd in the Drosophila leg. These findings suggest that the division of the limb into two antagonistic domains, as defined by exd (Pbx1) function and Hh signalling, may be a general feature of limb development.