Prenatal exposure to ethanol in humans results in a wide range of developmental abnormalities, including growth deficiency, developmental delay, reduced brain size, permanent neurobehavioral abnormalities and fetal death. Here we describe the use of Drosophila melanogaster as a model for exploring the effects of ethanol exposure on development and behavior. We show that developmental ethanol exposure causes reduced viability, developmental delay and reduced adult body size. We find that flies reared on ethanol-containing food have smaller brains and imaginal discs, which is due to reduced cell division rather than increased apoptosis. Additionally, we show that, as in mammals, flies reared on ethanol have altered responses to ethanol vapor exposure as adults, including increased locomotor activation, resistance to the sedating effects of the drug and reduced tolerance development upon repeated ethanol exposure. We have found that the developmental and behavioral defects are largely due to the effects of ethanol on insulin signaling; specifically, a reduction in Drosophila insulin-like peptide (Dilp) and insulin receptor expression. Transgenic expression of Dilp proteins in the larval brain suppressed both the developmental and behavioral abnormalities displayed by ethanol-reared adult flies. Our results thus establish Drosophila as a useful model system to uncover the complex etiology of fetal alcohol syndrome.