A role for Rac1 GTPase in canonical Wnt signaling has recently been demonstrated, showing that it is required for β-catenin translocation to the nucleus. In this study, we investigated the mechanism of Rac1 stimulation by Wnt. Upregulation of Rac1 activity by Wnt3a temporally correlated with enhanced p120-catenin binding to Rac1 and Vav2. Vav2 and Rac1 association with p120-catenin was modulated by phosphorylation of this protein, which was stimulated upon serine/threonine phosphorylation by CK1 and inhibited by tyrosine phosphorylation by Src or Fyn. Acting on these two post-translational modifications, Wnt3a induced the release of p120-catenin from E-cadherin, enabled the interaction of p120-catenin with Vav2 and Rac1, and facilitated Rac1 activation by Vav2. Given that p120-catenin depletion disrupts gastrulation in Xenopus, we analyzed p120-catenin mutants for their ability to rescue this phenotype. In contrast to the wild-type protein or other controls, p120-catenin point mutants that were deficient in the release from E-cadherin or in Vav2 or Rac1 binding failed to rescue p120-catenin depletion. Collectively, these results indicate that binding of p120-catenin to Vav2 and Rac1 is required for the activation of this GTPase upon Wnt signaling.