The Wnt pathway controls cell fates, tissue homeostasis, and cancer. Its activation entails the association of beta-catenin with nuclear TCF/LEF proteins and results in transcriptional activation of target genes. The mechanism by which nuclear beta-catenin controls transcription is largely unknown. Here we genetically identify a novel Wnt/Wg pathway component that mediates the transcriptional outputs of beta-catenin/Armadillo. We show that Drosophila Hyrax and its human ortholog, Parafibromin, components of the Polymerase-Associated Factor 1 (PAF1) complex, are required for nuclear transduction of the Wnt/Wg signal and bind directly to the C-terminal region of beta-catenin/Armadillo. Moreover, we find that the transactivation potential of Parafibromin/Hyrax depends on the recruitment of Pygopus to beta-catenin/Armadillo. Our results assign to the tumor suppressor Parafibromin an unexpected role in Wnt signaling and provide a molecular mechanism for Wnt target gene control, in which the nuclear Wnt signaling complex directly engages the PAF1 complex, thereby controlling transcriptional initiation and elongation by RNA Polymerase II.