Retinoic acid (RA) is a physiological agent that has a wide range of biological activity and appears to regulate developmental programs of vertebrates. However, little is known about the molecular basis of its metabolism. Here we have identified a novel cytochrome P450 (P450RA) that specifically metabolizes RA. In vitro, P450RA converts all-trans RA into 5,8-epoxy all-trans RA. P450RA metabolizes other biologically active RAs such as 9-cis RA and 13-cis RA, but fails to metabolize their precursors, retinol and retinal. Overexpression of P450RA in cell culture renders the cells hyposensitive to all-trans RA. These functional tests in vitro and in vivo indicate that P450RA inactivates RA. The P450RA gene is not expressed uniformly but in a stage- and region-specific fashion during mouse development. The major expression domains in developing embryos include the posterior neural plate and neural crest cells for cranial ganglia. The expression of P450RA, however, is not necessarily inducible by excess RA. These results suggest that P450RA regulates the intracellular level of RA and may be involved in setting up the uneven distribution of active RA in mammalian embryos.