The active thyroid hormone 3,5,3' triiodothyronine (T3) is a major regulator of skeletal muscle function. The deiodinase family of enzymes controls the tissue-specific activation and inactivation of the prohormone thyroxine (T4). Here we show that type 2 deiodinase (D2) is essential for normal mouse myogenesis and muscle regeneration. Indeed, D2-mediated increases in T3 were essential for the enhanced transcription of myogenic differentiation 1 (MyoD) and for execution of the myogenic program. Conversely, the expression of T3-dependent genes was reduced and after injury regeneration markedly delayed in muscles of mice null for the gene encoding D2 (Dio2), despite normal circulating T3 concentrations. Forkhead box O3 (FoxO3) was identified as a key molecule inducing D2 expression and thereby increasing intracellular T3 production. Accordingly, FoxO3-depleted primary myoblasts also had a differentiation deficit that could be rescued by high levels of T3. In conclusion, the FoxO3/D2 pathway selectively enhances intracellular active thyroid hormone concentrations in muscle, providing a striking example of how a circulating hormone can be tissue-specifically activated to influence development locally.