Thyroid hormone is a master regulator of differentiation and growth, and its action is terminated by the enzymatic removal of an inner-ring iodine catalyzed by the selenoenzyme type 3 deiodinase (dio3). Our studies of the zebrafish reveal that the dio3 gene is duplicated in this species and that embryonic deiodination is an important determinant of embryo size. Although both dio3 paralogs encode enzymatically active proteins with high affinity for thyroid hormones, their anatomic patterns of expression are markedly divergent and only embryos with knockdown of dio3b, a biallelically expressed selenoenzyme expressed in the developing central nervous system, manifest severe thyroid hormone-dependent growth restriction at 72 hours post fertilization. This indicates that the embryonic deficiency of dio3, once considered only a placental enzyme, causes microsomia independently of placental physiology and raises the intriguing possibility that fetal abnormalities in human deiodination may present as intrauterine growth retardation. By mapping the gene structures and enzymatic properties of all four zebrafish deiodinases, we also identify dio3b as the first multiexon dio3 gene, containing a large intron separating its open reading frame from its selenocysteine insertion sequence (SECIS) element.