Medaka (Oryzias latipes) is a small freshwater teleost that provides an excellent developmental genetic model complementary to zebrafish. Our recent mutagenesis screening using medaka identified headfish (hdf) which is characterized by the absence of trunk and tail structures with nearly normal head including the midbrain-hindbrain boundary (MHB). Positional-candidate cloning revealed that the hdf mutation causes a functionally null form of Fgfr1. The fgfr1hdf is thus the first fgf receptor mutant in fish. Although FGF signaling has been implicated in mesoderm induction, mesoderm is induced normally in the fgfr1hdf mutant, but subsequently, mutant embryos fail to maintain the mesoderm, leading to defects in mesoderm derivatives, especially in trunk and tail. Furthermore, we found that morpholino knockdown of medaka fgf8 resulted in a phenotype identical to the fgfr1hdf mutant, suggesting that like its mouse counterpart, Fgf8 is a major ligand for Fgfr1 in medaka early embryogenesis. Intriguingly, Fgf8 and Fgfr1 in zebrafish are also suggested to form a major ligand-receptor pair, but their function is much diverged, as the zebrafish fgfr1 morphant and zebrafish fgf8 mutant acerebellar (ace) only fail to develop the MHB, but develop nearly unaffected trunk and tail. These results provide evidence that teleost fish have evolved divergent functions of Fgf8-Fgfr1 while maintaining the ligand-receptor relationships. Comparative analysis using different fish is thus invaluable for shedding light on evolutionary diversification of gene function.