The freshwater polyp Hydra is a cnidarian used as a model organism in a number of fields, including the study of the origin and evolution of developmental mechanisms, aging, symbiosis and host-microbe interactions. Here, we describe a procedure for the establishment of stable transgenic Hydra lines by embryo microinjection. The three-stage protocol comprises (i) the design and preparation of a transgenic construct, (ii) the microinjection of the vector into early embryos of Hydra vulgaris, and (iii) the selection and enrichment of mosaic animals in order to develop uniformly transgenic clonal lines. The preparation of a transgenic construct requires ~2 weeks, and transgenic lines can be obtained within 3 months. The method allows constitutive or inducible gain- and loss-of-function approaches, as well as in vivo tracing of individual cells. Hydra polyps carrying transgenic cells reveal functional properties of the ancestral circuitry controlling animal development.