Zebrafish embryos homozygous for the masterblind (mbl) mutation exhibit a striking phenotype in which the eyes and telencephalon are reduced or absent and diencephalic fates expand to the front of the brain. Here we show that mbl(-/-) embryos carry an amino-acid change at a conserved site in the Wnt pathway scaffolding protein, Axin1. The amino-acid substitution present in the mbl allele abolishes the binding of Axin to Gsk3 and affects Tcf-dependent transcription. Therefore, Gsk3 activity may be decreased in mbl(-/-) embryos and in support of this possibility, overexpression of either wild-type Axin1 or Gsk3beta can restore eye and telencephalic fates to mbl(-/-) embryos. Our data reveal a crucial role for Axin1-dependent inhibition of the Wnt pathway in the early regional subdivision of the anterior neural plate into telencephalic, diencephalic, and eye-forming territories.