Transcriptional control by TCF/LEF proteins is crucial in key developmental processes such as embryo polarity, tissue architecture and cell fate determination. TCFs associate with β-catenin to activate transcription in the presence of Wnt signaling, but in its absence act as repressors together with Groucho-family proteins (GRGs). TCF4 is critical in vertebrate intestinal epithelium, where TCF4-β-catenin complexes are necessary for the maintenance of a proliferative compartment, and their abnormal formation initiates tumorigenesis. However, the extent of TCF4-GRG complexes' roles in development and the mechanisms by which they repress transcription are not completely understood. Here we characterize the interaction between TCF4 and GRG5/AES, a Groucho family member whose functional relationship with TCFs has been controversial. We map the core GRG interaction region in TCF4 to a 111-amino acid fragment and show that, in contrast to other GRGs, GRG5/AES-binding specifically depends on a 4-amino acid motif (LVPQ) present only in TCF3 and some TCF4 isoforms. We further demonstrate that GRG5/AES represses Wnt-mediated transcription both in human cells and zebrafish embryos. Importantly, we provide the first evidence of an inherent repressive function of GRG5/AES in dorsal-ventral patterning during early zebrafish embryogenesis. These results improve our understanding of TCF-GRG interactions, have significant implications for models of transcriptional repression by TCF-GRG complexes, and lay the groundwork for in depth direct assessment of the potential role of Groucho-family proteins in both normal and abnormal development.