Mitochondria are dynamic cellular organelles that balance fission and fusion to regulate organelle morphology, distribution, and activity, and Opa1 is one of three GTPases known to regulate mitochondrial fusion. In humans, loss of a single Opa1 allele causes dominant optic atrophy, a degenerative condition that leads to loss of vision. Here we demonstrate that the lilR3 mutant mouse phenotype is due to a point mutation in the Opa1 gene resulting in mislocalized Opa1 protein from the mitochondria to the cytosol. Importantly, the mutation is in the middle domain of the Opa1 protein, for which no function had been described. Lack of mitochondrial retention of Opa1 is sufficient to cause the cellular Opa1 loss-of-function phenotype as the mitochondria are fragmented, indicating an inability to fuse. Despite the normally ubiquitous expression of Opa1 and the essential nature of mitochondria, embryos with aberrant Opa1 survived through midgestation and died at E11.5. These mutants displayed growth retardation, exencephaly, and abnormal patterning along the anterior-posterior axis, although the A-P axis itself was intact. The complex relationship between mitochondrial dynamics and cell death is emphasized by apoptosis in specific cell populations of lilR3 embryos. Our results define, for the first time, a function of the middle domain of the Opa1 protein and demonstrate that mitochondrial retention of Opa1 protein is essential for normal embryogenesis.