The LIN-3-LET-23-mediated inductive signaling pathway plays a major role during vulval development in C. elegans. Studies on the components of this pathway have revealed positive as well as negative regulators that function to modulate the strength and specificity of the signal transduction cascade. We have carried out genetic screens to identify new regulators of this pathway by screening for suppressors of lin-3 vulvaless phenotype. The screens recovered three loci including alleles of gap-1 and a new gene represented by sli-3. Our genetic epistasis experiments suggest that sli-3 functions either downstream or in parallel to nuclear factors lin-1 and sur-2. sli-3 synergistically interacts with the previously identified negative regulators of the let-23 signaling pathway and causes excessive cell proliferation. However, in the absence of any other mutation sli-3 mutant animals display wild-type vulval induction and morphology. We propose that sli-3 functions as a negative regulator of vulval induction and defines a branch of the inductive signaling pathway. We provide evidence that sli-3 interacts with the EGF signaling pathway components during vulval induction but not during viability and ovulation processes. Thus, sli-3 helps define specificity of the EGF signaling to induce the vulva.