In vertebrate embryos, induction and patterning of the forebrain require the local inhibition of caudalizing signals, such as Wnts, emanating from the mesendoderm and caudal brain. Here, we report that Lhx5, expressed in the rostral neuroectoderm, regulates the local inhibition of Wnts. Activation of Lhx5 expands forebrain structures, whereas inhibition of Lhx5 function compromises forebrain development in zebrafish embryos. Lhx5 can rescue forebrain deficiencies caused by excess Wnt activity, and inhibition of Lhx5 function results in ectopic activation of Wnt signaling. Lhx5 regulates the expression of two secreted Frizzled-related Wnt antagonists, Sfrp1a and Sfrp5. These Sfrps can reduce the ectopic activation of Wnt signaling and rescue the forebrain deficiencies caused by inhibition of Lhx5 function. Our results demonstrate that Lhx5 is a required factor that promotes forebrain development and inhibits Wnt signaling by activating the transcription of secreted Wnt antagonists.