Caveolae are an abundant feature of many animal cells. However, the exact function of caveolae remains unclear. We have used the zebrafish, Danio rerio, as a system to understand caveolae function focusing on the muscle-specific caveolar protein, caveolin-3 (Cav3). We have identified caveolin-1 (alpha and beta), caveolin-2 and Cav3 in the zebrafish. Zebrafish Cav3 has 72 identity to human CAV3, and the amino acids altered in human muscle diseases are conserved in the zebrafish protein. During embryonic development, cav3 expression is apparent by early segmentation stages in the first differentiating muscle precursors, the adaxial cells and slightly later in the notochord. cav3 expression appears in the somites during mid-segmentation stages and then later in the pectoral fins and facial muscles. Cav3 and caveolae are located along the entire sarcolemma of late stage embryonic muscle fibers, whereas beta-dystroglycan is restricted to the muscle fiber ends. Down-regulation of Cav3 expression causes gross muscle abnormalities and uncoordinated movement. Ultrastructural analysis of isolated muscle fibers reveals defects in myoblast fusion and disorganized myofibril and membrane systems. Expression of the zebrafish equivalent to a human muscular dystrophy mutant, CAV3P104L, causes severe disruption of muscle differentiation. In addition, knockdown of Cav3 resulted in a dramatic up-regulation of eng1a expression resulting in an increase in the number of muscle pioneer-like cells adjacent to the notochord. These studies provide new insights into the role of Cav3 in muscle development and demonstrate its requirement for correct intracellular organization and myoblast fusion.