Canonical Wnt signaling critically regulates cell fate and proliferation in development and disease. Nuclear localization of beta-catenin is indispensable for canonical Wnt signaling; however, the mechanisms governing beta-catenin nuclear localization are not well understood. Here we demonstrate that nuclear accumulation of beta-catenin in response to Wnt requires Rac1 activation. The role of Rac1 depends on phosphorylation of beta-catenin at Ser191 and Ser605, which is mediated by JNK2 kinase. Mutations of these residues significantly affect Wnt-induced beta-catenin nuclear accumulation. Genetic ablation of Rac1 in the mouse embryonic limb bud ectoderm disrupts canonical Wnt signaling and phenocopies deletion of beta-catenin in causing severe truncations of the limb. Finally, Rac1 interacts genetically with beta-catenin and Dkk1 in controlling limb outgrowth. Together these results uncover Rac1 activation and subsequent beta-catenin phosphorylation as a hitherto uncharacterized mechanism controlling canonical Wnt signaling and may provide additional targets for therapeutic intervention of this important pathway.