During the metamorphosis of the Xenopus laevis retina, thyroid hormone (TH) preferentially induces ventral ciliary marginal zone (CMZ) cells to both increase their proliferation and give rise to ipsilaterally projecting ganglion cells. Here we show that dorsal CMZ cells express type III deiodinase (D3), an enzyme that inactivates TH. The dorsal CMZ cells can be induced to proliferate if deiodinase activity is inhibited. D3 or dominant-negative thyroid hormone receptor transgenes inhibit both TH-induced proliferation of the ventral CMZ cells and the formation of the ipsilateral projection. Thus, the localized expression of D3 in the dorsal CMZ cells accounts for the asymmetric growth of the frog retina.