Retinoic acid (RA) has pleiotropic functions during embryogenesis. In zebrafish, increasing or blocking RA signaling results in enlarged or reduced otic vesicles, respectively. Here we elucidate the mechanisms that underlie these changes and show that they have origins in different tissues. Excess RA leads to ectopic foxi1 expression throughout the entire preplacodal domain. Foxi1 provides competence to adopt an otic fate. Subsequently, pax8, the expression of which depends upon Foxi1 and Fgf, is also expressed throughout the preplacodal domain. By contrast, loss of RA signaling does not affect foxi1 expression or otic competence, but instead results in delayed onset of fgf3 expression and impaired otic induction. fgf8 mutants depleted of RA signaling produce few otic cells, and these cells fail to form a vesicle, indicating that Fgf8 is the primary factor responsible for otic induction in RA-depleted embryos. Otic induction is rescued by fgf8 overexpression in RA-depleted embryos, although otic vesicles never achieve a normal size, suggesting that an additional factor is required to maintain otic fate. fgf3;tcf2 double mutants form otic vesicles similar to RA-signaling-depleted embryos, suggesting a signal from rhombomere 5-6 may also be required for otic fate maintenance. We show that rhombomere 5 wnt8b expression is absent in both RA-signaling-depleted embryos and in fgf3;tcf2 double mutants, and inactivation of wnt8b in fgf3 mutants by morpholino injection results in small otic vesicles, similar to RA depletion in wild type. Thus, excess RA expands otic competence, whereas the loss of RA impairs the expression of fgf3 and wnt8b in the hindbrain, compromising the induction and maintenance of otic fate.