Developmental exposure to appropriate levels of thyroid hormones (THs) in a timely manner is critical to normal development in vertebrates. Among the factors potentially affecting perinatal exposure of tissues to THs is type 3 deiodinase (D3). This enzyme degrades THs and is highly expressed in the pregnant uterus, placenta, and fetal and neonatal tissues. To determine the physiological role of D3, we have generated a mouse D3 knockout model (D3KO) by a targeted inactivating mutation of the Dio3 gene in mouse ES cells. Early in life, D3KO mice exhibit delayed 3,5,3′-triiodothyronine (T3) clearance, a markedly elevated serum T3 level, and overexpression of T3-inducible genes in the brain. From postnatal day 15 to adulthood, D3KO mice demonstrate central hypothyroidism, with low serum levels of 3,5,3′,5′-tetraiodothyronine (T4) and T3, and modest or no increase in thyroid-stimulating hormone (TSH) concentration. Peripheral tissues are also hypothyroid. Hypothalamic T3 content is decreased while thyrotropin-releasing hormone (TRH) expression is elevated. Our results demonstrate that the lack of D3 function results in neonatal thyrotoxicosis followed later by central hypothyroidism that persists throughout life. These mice provide a new model of central hypothyroidism and reveal a critical role for D3 in the maturation and function of the thyroid axis.