Wnts are a family of secreted glycoproteins that are important for multiple steps in early development. Accumulating evidence suggests that frizzled genes encode receptors for Wnts. However, the mechanism through which frizzleds transduce a signal and the immediate downstream components that convey that signal are unclear. We have identified a new protein, Kermit, that interacts specifically with the C-terminus of Xenopus frizzled-3 (Xfz3). Kermit is a 331 amino acid protein with a central PDZ domain. Kermit mRNA is expressed throughout Xenopus development and is localized to neural tissue in a pattern that overlaps Xfz3 expression temporally and spatially. Co-expression of Xfz3 and Kermit results in a dramatic translocation of Kermit to the plasma membrane. Inhibition of Kermit function with morpholino antisense oligonucleotides directed against the 5' untranslated region of Kermit mRNA blocks neural crest induction by Xfz3, and this is rescued by co-injection of mRNA encoding the Kermit open reading frame. These observations suggest that Kermit is required for Wnt/frizzled signaling in neural crest development. To the best of our knowledge, Kermit is the first protein identified that interacts directly with the cytoplasmic portion of frizzleds to modulate their signaling activity.