Wnt signalling is a key regulator of vertebrate heart development yet the exact requirements of the Wnt signalling components remains unclear. The endogenous Wnt ligand Wnt6 has been identified as a regulator of cardiogenesis required for controlling heart muscle differentiation via canonical Wnt/β-catenin signalling. We show for the first time a requirement for an endogenous Wnt signalling inhibitor for normal heart muscle differentiation. Expression of sfrp1 is strongly induced in differentiating heart muscle. We show that sfrp1 is not only able to promote heart muscle differentiation but is also required for the formation of a normal sized heart muscle in the developing embryo. sfrp1 is functionally able to inhibit Wnt6 signalling and its requirement during heart development relates to relieving the cardiogenesis-restricting function of endogenous wnt6. In turn, we discover that sfrp1 gene expression in the heart is regulated by wnt6 signalling, which for the first time indicates that sfrp genes can function as part of a negative Wnt feedback regulatory loop. Our experiments indicate that sfrp1 controls the size of the differentiating heart muscle primarily by regulating cell fate within the cardiac mesoderm between muscular and non-muscular cell lineages. The cardiac mesoderm is therefore not passively patterned by signals from the surrounding tissue, but regulates its differentiation into muscular and non-muscular tissue using positional information from the surrounding tissue. This regulatory network may ensure that Wnt activation enables expansion and migration of cardiac progenitors, followed by Wnt inhibition permitting cardiomyocyte differentiation.