Retinoic acid (RA), a derivative of vitamin A, plays a pivotal role in vertebrate development. The level of RA may be determined by the balance between its synthesis and degradation. We have examined the role of CYP26, a P450 enzyme that may degrade RA, by generating mutant mice that lack CYP26. CYP26(-/-) mice exhibited anomalies, including caudal agenesis, similar to those induced by administration of excess RA. The concentration of endogenous RA, as revealed by marker gene activity, was markedly increased in the tailbud of the mutant animals, in which CYP26 is normally expressed. Expression of T (Brachyury) and Wnt3a in the tailbud was down-regulated in CYP26(-/-) mice, which may underlie the caudal truncation. The lack of CYP26 also resulted in homeotic transformation of vertebrae as well as in misspecification of the rostral hindbrain associated with anterior expansion of RA-positive domains. These results suggest that local degradation of RA by CYP26 is required for establishing an uneven distribution of RA along the anterio-posterior axis, which is essential for patterning the hindbrain, vertebrae, and tailbud.