Half a century ago, thalidomide was widely prescribed to pregnant women as a sedative but was found to be teratogenic, causing multiple birth defects. Today, thalidomide is still used in the treatment of leprosy and multiple myeloma, although how it causes limb malformation and other developmental defects is unknown. Here, we identified cereblon (CRBN) as a thalidomide-binding protein. CRBN forms an E3 ubiquitin ligase complex with damaged DNA binding protein 1 (DDB1) and Cul4A that is important for limb outgrowth and expression of the fibroblast growth factor Fgf8 in zebrafish and chicks. Thalidomide initiates its teratogenic effects by binding to CRBN and inhibiting the associated ubiquitin ligase activity. This study reveals a basis for thalidomide teratogenicity and may contribute to the development of new thalidomide derivatives without teratogenic activity.