Progenitors in the developing central nervous system acquire neural potential and proliferate to expand the pool of precursors competent to undergo neuronal differentiation. The formation and maintenance of neural-competent precursors are regulated by SoxB1 transcription factors, and evidence that their expression is regionally regulated suggests that specific signals regulate neural potential in subdomains of the developing nervous system. We show that the frizzled (Fz) transmembrane receptor Xfz5 selectively governs neural potential in the developing Xenopus retina by regulating the expression of Sox2. Blocking either Xfz5 or canonical Wnt signaling within the developing retina inhibits Sox2 expression, reduces cell proliferation, inhibits the onset of proneural gene expression, and biases individual progenitors toward a nonneural fate, without altering the expression of multiple progenitor markers. Blocking Sox2 function mimics these effects. Rescue experiments indicate that Sox2 is downstream of Xfz5. Thus, Fz signaling can regulate the neural potential of progenitors in the developing nervous system.