The caudal gene codes for a homeodomain transcription factor that is required for normal posterior development in Drosophila. In this study the biological activities of the Xenopus caudal (Cdx) family member Xcad3 are examined. A series of domain‐swapping experiments demonstrate that the N‐terminus of Xcad3 is necessary for it to activate Hox gene expression and that this function can be replaced by the activation domain from the viral protein VP16. In addition, experiments using an Xcad3 repressor mutant (XcadEn‐R), which potently blocks the activity of wild‐type Xcad3, are reported. Overexpression of XcadEn‐R in embryos inhibits the activation of the same subset of Hox genes that are activated by wild‐type Xcad3 and leads to a dramatic disruption of posterior development. We show that Xcad3 is an immediate early target of the FGF signalling pathway and that Xcad3 posteriorizes anterior neural tissue in a similar way to FGF. Furthermore, Xcad3 is required for the activation of Hox genes by FGFs. These data provide strong evidence that Xcad3 is required for normal posterior development and that it regulates the expression of the Hox genes downstream of FGF signalling.