Neural tube defects (NTDs), such as spina bifida, are common and severe birth defects in humans but the underlying causes are poorly understood. The pathogenesis and etiology of spina bifida in the curly tail mouse closely resemble defects in humans, providing a well-characterized model of NTDs. Grainyhead-like-3 (Grhl3), which encodes a transcription factor, was recently identified as a candidate gene for curly tail based on chromosomal location and the occurrence of spina bifida in Grhl3 null mice. However, the causative curly tail mutation has not been established, while the relationship between Grhl3 gene expression and the known cellular defect leading to NTDs in curly tail is unknown. Spina bifida in curly tail results from a cell type-specific proliferation defect in the hindgut endoderm, and we find that Grhl3 is expressed specifically in this tissue during the final stages of spinal neural tube closure in wild type embryos. Moreover, Grhl3 expression is diminished in the spinal region of neurulation-stage curly tail embryos. Curly tail mice do not carry a coding region mutation in Grhl3, however, we found a putative regulatory mutation upstream of the Grhl3 gene, which may be responsible for the expression deficit. In order to test the hypothesis that spina bifida in curly tail mice results from insufficient expression of Grhl3, we generated Grhl3-expressing curly tail mice by bacterial artificial chromosome-mediated transgenesis and demonstrated complete rescue of spina bifida. This study provides evidence for a critical role of diminished Grhl3 expression in causing spinal NTDs in the curly tail mouse model.