We have studied the ability of the Drosophila gap proteins Krüppel and hunchback to function as transcriptional regulators in cultured cells. Both proteins bind to specific sites in a 100-bp DNA fragment located upstream of the segment polarity gene engrailed, which also contains functional binding sites for a number of homeo box proteins. The hunchback protein is a strikingly concentration-dependent activator of transcription, capable of functioning both by itself and also synergistically with the pair-rule proteins fushi tarazu and paired. In contrast, Krüppel is a transcriptional repressor that can block transcription induced either by hunchback or by several different homeo box proteins. While repression of the homeo box protein activators requires a Krüppel-binding site on the DNA, repression of hunchback can occur efficiently in the absence of a Krüppel-binding site. We discuss the possible molecular mechanisms underlying these activities, as well as the potential significance of these results with respect to segmentation in Drosophila.