The canonical Wnt/β-catenin signaling pathway classically functions through the activation of target genes by Tcf/Lef–β-catenin complexes. In contrast to β-catenin-dependent functions described for Tcf1, Tcf4 and Lef1, the known embryonic functions for Tcf3 in mice, frogs and fish are consistent with β-catenin-independent repressor activity. In this study, we genetically define Tcf3–β-catenin functions in mice by generating a Tcf3ΔN knock-in mutation that specifically ablates Tcf3–β-catenin. Mouse embryos homozygous for the knock-in mutation (Tcf3^ΔN/ΔN) progress through gastrulation without apparent defects, thus genetically proving that Tcf3 function during gastrulation is independent of β-catenin interaction. Tcf3^ΔN/ΔN mice were not viable, and several post-gastrulation defects revealed the first in vivo functions of Tcf3–β-catenin interaction affecting limb development, vascular integrity, neural tube closure and eyelid closure. Interestingly, the etiology of defects indicated an indirect role for Tcf3–β-catenin in the activation of target genes. Tcf3 directly represses transcription of Lef1, which is stimulated by Wnt/β-catenin activity. These genetic data indicate that Tcf3–β-catenin is not necessary to activate target genes directly. Instead, our findings support the existence of a regulatory circuit whereby Wnt/β-catenin counteracts Tcf3 repression of Lef1, which subsequently activates target gene expression via Lef1–β-catenin complexes. We propose that the Tcf/Lef circuit model provides a mechanism downstream of β-catenin stability for controlling the strength of Wnt signaling activity during embryonic development.