Risk of neural tube defects (NTDs) is determined by genetic and environmental factors, among which folate status appears to play a key role. However, the precise nature of the link between low folate status and NTDs is poorly understood, and it remains unclear how folic acid prevents NTDs. We investigated the effect of folate level on risk of NTDs in splotch (Sp(2)(H)) mice, which carry a mutation in Pax3. Dietary folate restriction results in reduced maternal blood folate, elevated plasma homocysteine and reduced embryonic folate content. Folate deficiency does not cause NTDs in wild-type mice, but causes a significant increase in cranial NTDs among Sp(2)(H) embryos, demonstrating a gene-environment interaction. Control treatments, in which intermediate levels of folate are supplied, suggest that NTD risk is related to embryonic folate concentration, not maternal blood folate concentration. Notably, the effect of folate deficiency appears more deleterious in female embryos than males, since defects are not prevented by exogenous folic acid. Folate-deficient embryos exhibit developmental delay and growth retardation. However, folate content normalized to protein content is appropriate for developmental stage, suggesting that folate availability places a tight limit on growth and development. Folate-deficient embryos also exhibit a reduced ratio of s-adenosylmethionine (SAM) to s-adenosylhomocysteine (SAH). This could indicate inhibition of the methylation cycle, but we did not detect any diminution in global DNA methylation, in contrast to embryos in which the methylation cycle was specifically inhibited. Hence, folate deficiency increases the risk of NTDs in genetically predisposed splotch embryos, probably via embryonic growth retardation.