Retinoic acid and related retinoids have been suggested to contribute to the pattern of cell differentiation during vertebrate embryonic development. To identify cell groups that release morphogenetically active retinoids, we have developed a reporter assay that makes use of a retinoic acid inducible response element (RARE) to drive lacZ or luciferase reporter genes in stably transfected cell lines. This reporter gene assay allows detection of retinoids released from embryonic tissues over a range equivalent to that induced by femtomole amounts of retinoic acid. We have used this assay first to determine whether the floor plate, a cell group that has polarizing properties in neural tube and limb bud differentiation, is a local source of retinoids within the spinal cord. We have also examined whether the effects of exogenously administered retinoic acid on anteroposterior patterning of cells in the developing central nervous system correlate with differences in retinoid release from anterior and posterior neural tissue. We find that the release of morphogenetically active retinoids from the floor plate is only about 1.5-fold that of the dorsal spinal cord, which does not have neural tube or limb polarizing activity. These results suggest that the spatial distribution of retinoid release from spinal cord tissues differs from that of the neural and limb polarizing activity. This assay has also shown that retinoids are released from the embryonic spinal cord at much greater levels than from the forebrain. This result, together with previous observations that the development of forebrain structures is suppressed by low concentrations of retinoic acid, suggest that the normal development of forebrain structures is dependent on the maintenance of low concentrations of retinoids in anterior regions of the embryonic axis. This assay has also provided initial evidence that other embryonic tissues with polarizing properties in vivo release retinoids in vitro.