Wnt signalling plays an important role in both embryonic development and in tumourigenesis. Activation of the signalling cascade by wnt, but also mutations of the adenomatous polyposis coli (APC) protein and of the phosphorylation domain of beta-catenin, result in accumulation of active beta-catenin in the nucleus, where it binds to TCF/LEF transcription factors. We studied the effect of wnt signalling in embryonic stem cells by either inactivating APC or by introducing a dominant active form of beta-catenin. Both resulted in inhibition of neural differentiation in vitro and after brain grafting and in activation of downstream targets of wnt signalling, such as cyclins, c-myc, and bone morphogenetic proteins (BMP). Neural differentiation could be partially restored by the addition of the BMP antagonist noggin. This suggests a mechanism regulating the fate of differentiating embryonic stem cells.