The interferon-stimulated gene 15 (Isg15) encodes a ubiquitin-like protein that is induced in the endometrium by pregnancy in mice, humans, and ruminants. Because ISG15 is a component of the innate immune system, we hypothesized that development of the embryo, fetus, and postnatal pup may be impaired in mice lacking Isg15 (Isg15^−/−) and that this development would be further impaired in response to environmental insults such as hypoxia. The number of implantation sites, resorption sites, dead embryos, and the changes in overall gross morphology of the uterus were evaluated in Isg15^−/− mice on Days 7.5 and 12.5 postcoitum (dpc). Postnatal development also was monitored from birth to 12 wk of age. On 7.5 dpc, the number of implantation sites and serum progesterone concentrations were similar. However, embryo mortality increased (P < 0.05) in Isg15^−/− dams by 12.5 dpc, resulting in smaller litter sizes (4.26 ± 0.21 embryos; n = 83 litters) compared to Isg15 ^/ females (7.78 ± 0.29 pups; n = 47 litters). Embryo mortality in Isg15^−/− mice was further exacerbated to 70% when dams were stressed through housing under hypoxic conditions (P_B = 445 mmHg; 6.5–12.5 dpc). Transmission electron microscopy revealed lesions in antimesometrial decidua as well as trophoblast cells adjacent to decidual cells on 7.5 dpc. ISG15 was localized to mesometrial decidua on 7.5 dpc. By 12.5 dpc, ISG15 was intensely localized to the labyrinth of the placenta. By 7.5 dpc, uterine natural killer cell migration into the mesometrial pole was diminished by 65% and was less prevalent in Isg15^−/− compared to Isg15 ^/ deciduum. Postnatal growth rate of offspring that survived to birth from Isg15^−/− and Isg15 ^/ dams was not different. Embryo mortality occurs in pregnant Isg15^−/− mice, is exacerbated by environmental insults like maternal hypoxia, and might result from impaired early decidualization, vascular development, and formation of the labyrinth.