Retinoid signalling plays an important role in embryonic pattern formation. Excess of retinoic acid during gastrulation results in axial defects in vertebrate embryos, suggesting that retinoids are involved in early anteroposterior patterning. To study retinoid signalling in zebrafish embryos, we developed a novel method to detect endogenous retinoids in situ in embryos, using a fusion protein of the ligand inducible transactivation domain of a retinoic acid receptor and a heterologous DNA binding domain. Using this method, we show that retinoid signalling is localized in zebrafish embryos in the region of the embryonic shield, and towards the end of gastrulation in a posterior dorsal domain. To investigate the relationships between the spatial distribution of retinoid signalling and the regulation of retinoid target genes, we studied the downregulation by retinoic acid of two genes expressed in anterior regions of the embryo, goosecoid and otx1. These experiments show that expression of both genes is strongly downregulated in the anterior neurectoderm of zebrafish embryos treated with retinoic acid, whereas mesendodermal expression is only mildly affected. Interestingly, a significant downregulation of goosecoid expression by retinoic acid was observed only during midgastrulation but not in earlier stages. In agreement with these results, spatial expression of goosecoid and otx1 does not overlap with the region of retinoid signalling in the late gastrula. Our data support the hypothesis that a localized retinoid signal is involved in axial patterning during early development, at least in part through the repression of anterior genes in posterior regions of the embryo. Furthermore, our data suggest that the action of retinoids is spatially as well as temporally regulated in the developing embryo.