Armadillo, the Drosophila homolog of beta-catenin, plays a crucial role in both the Wingless signal transduction pathway and cadherin-mediated cell-cell adhesion, raising the possibility that Wg signaling affects cell adhesion. Here, we use a tissue culture system that allows conditional activation of the Wingless signaling pathway and modulation of E-cadherin expression levels. We show that activation of the Wingless signaling pathway leads to the accumulation of hypophosphorylated Armadillo in the cytoplasm and in cellular processes, and to a concomitant reduction of membrane-associated Armadillo. Activation of the Wingless pathway causes a loss of E-cadherin from the cell surface, reduced cell adhesion and increased spreading of the cells on the substratum. After the initial loss of E-cadherin from the cell surface, E-cadherin gene expression is increased by Wingless. We suggest that Wingless signaling causes changes in Armadillo levels and subcellular localization that result in a transient reduction of cadherin-mediated cell adhesion, thus facilitating cell shape changes, division and movement of cells in epithelial tissues.