Holoprosencephaly (HPE) is the most frequently observed human embryonic forebrain defect. Recent evidence indicates that the two major forms of HPE, classic HPE and midline interhemispheric (MIH) HPE, are elicited by two different mechanisms. The only gene known to be associated with both forms of HPE is Zic2. We used the zebrafish Danio rerio as a model system to study Zic knockdown during midline formation by looking at the close homolog Zic1, which is expressed in an overlapping fashion with Zic2. Zic1 knockdown in zebrafish leads to a strong midline defect including partial cyclopia due to attenuated Nodal and Hedgehog signaling in the anterior ventral diencephalon. Strikingly, we were able to show that Zic1 is also required for maintaining early forebrain expression of the retinoic acid (RA)-degrading enzyme cyp26a1. Zic1 LOF leads to increased RA levels in the forebrain, subsequent ventralization of the optic vesicle and down-regulation of genes involved in dorsal BMP signaling. Repression of BMP signaling in dorsal forebrain has been implicated in causing MIH HPE. This work provides a mechanistical explanation at the molecular level of why Zic factors are associated with both major forms of HPE.