The cubitus interruptus (ci) gene of Drosophila is expressed in all anterior compartment cells in both embryos and imaginal disks where it encodes a putative zinc-finger protein related to the vertebrate Gli and C. elegans Tra-1 proteins. Using ci/lacZ fusions, we located regulatory sequences responsible for the normal pattern of ci expression, and obtained evidence that separate elements regulate its expression in embryos and imaginal disks. Mutants that delete a portion of this regulatory region express ci ectopically in the posterior compartments of their wing imaginal disks and have wings with malformed posterior compartments. Similar deletions of ci/lacZ fusion constructs also result in ectopic posterior compartment expression. Evidence that the engrailed protein normally represses ci in posterior compartments includes the expansion of ci expression into posterior compartment cells that lack engrailed function, diminution of ci expression upon overexpression of engrailed protein in anterior compartment cells, and the ability of engrailed protein to bind to the ci regulatory region in vivo and in vitro. We suggest that engrailed protein directly represses ci expression in posterior compartment cells.