Oxygen deprivation can cause severe defects in human brain development, yet the precise cellular and molecular consequences of varying oxygen levels on nervous system development are unknown. We found that hypoxia caused specific axon pathfinding and neuronal migration defects in C. elegans that result from the stabilization of the transcription factor HIF-1 (hypoxia-inducible factor 1) in neurons and muscle. Stabilization of HIF-1 through removal of the proteasomal HIF-1 degradatory pathway phenocopies the hypoxia-induced neuronal defects. Hypoxia-mediated defects in nervous system development depended on signaling through the insulin-like receptor DAF-2, which serves to control the level of reactive oxygen species that also affects axon pathfinding. Hypoxia exerted its effect on axon pathfinding, at least in part, through HIF-1-dependent regulation of the Eph receptor VAB-1. HIF-1-mediated upregulation of VAB-1 protected embryos from hypoxia-induced lethality, but increased VAB-1 levels elicited aberrant axon pathfinding. Similar genetic pathways may cause aberrant human brain development under hypoxic conditions.