Hematopoiesis is a complex process which gives rise to all blood lineages in the course of an organism's lifespan. However, the underlying molecular mechanism governing this process is not fully understood. Here we report the isolation and detailed study of a newly identified zebrafish ugly duckling (Udu) mutant allele, Udu(sq1). We show that loss-of-function mutation in the udu gene disrupts primitive erythroid cell proliferation and differentiation in a cell-autonomous manner, resulting in red blood cell (RBC) hypoplasia. Positional cloning reveals that the Udu gene encodes a novel factor that contains 2 paired amphipathic alpha-helix-like (PAH-L) repeats and a putative SANT-L (SW13, ADA2, N-Cor, and TFIIIB-like) domain. We further show that the Udu protein is predominantly localized in the nucleus and deletion of the putative SANT-L domain abolishes its function. Our study indicates that the Udu protein is very likely to function as a transcription modulator essential for the proliferation and differentiation of erythroid lineage.