The tail bud comprises the caudal extremity of the vertebrate embryo, containing a pool of pluripotent mesenchymal stem cells that gives rise to almost all the tissues of the sacro-caudal region. Treatment of pregnant mice with 100 mg/kg all-trans retinoic acid at 9.5 days post coitum induces severe truncation of the body axis, providing a model system for studying the mechanisms underlying development of caudal agenesis. In the present study, we find that retinoic acid treatment causes extensive apoptosis of tail bud cells 24 h after treatment. Once the apoptotic cells have been removed, the remaining mesenchymal cells differentiate into an extensive network of ectopic tubules, radially arranged around the notochord. These tubules express Pax-3 and Pax-6 in a regionally-restricted pattern that closely resembles expression in the definitive neural tube. Neurofilament-positive neurons subsequently grow out from the ectopic tubules. Thus, the tail bud cells remaining after retinoic acid-induced apoptosis appear to adopt a neural fate. Wnt-3a, a gene that has been shown to be essential for tail bud formation, is specifically down-regulated in the tail bud of retinoic acid-treated embryos, as early as 2 h after retinoic acid treatment and Wnt-3a transcripts become undetectable by 10 h. In contrast, Wnt-5a and RAR-gamma are still detectable in the tail bud at that time. Extensive cell death also occurs in the tail bud of embryos homozygous for the vestigial tail mutation, in which there is a marked reduction in Wnt-3a expression. These embryos go on to develop multiple neural tubes in their truncated caudal region. These results suggest that retinoic acid induces down-regulation of Wnt-3a which may play an important role in the pathogenesis of axial truncation, involving induction of widespread apoptosis, followed by an alteration of tail bud cell fate to form multiple ectopic neural tubes.