In the developing retina, a retinoic acid (RA) gradient along the dorso-ventral axis is believed to be a prerequisite for the establishment of dorso-ventral asymmetry. This RA gradient is thought to result from the asymmetrical distribution of RA-generating aldehyde dehydrogenases along the dorso-ventral axis. Here, we identified a novel aldehyde dehydrogenase specifically expressed in the chick ventral retina, using restriction landmark cDNA scanning (RLCS). Since this molecule showed enzymatic activity to produce RA from retinaldehyde, we designated it retinaldehyde dehydrogenase 3 (RALDH-3). Structural similarity suggested that RALDH-3 is the orthologue of human aldehyde dehydrogenase 6. We also isolated RALDH-1 which is expressed in the chick dorsal retina and implicated in RA formation. Raldh-3 was preferentially expressed first in the surface ectoderm overlying the ventral portion of the prospective eye region and then in the ventral retina, earlier than Raldh-1 in chick and mouse embryos. High level expression of Raldh-3 was also observed in the nasal region. In addition, we found that Pax6 mutants are devoid of Raldh-3 expression. These results suggested that Raldh-3 is the key enzyme in the formation of an RA gradient along the dorso-ventral axis during the early eye development, and also in the development of the olfactory system.