Pregestational diabetes is highly associated with increased risk of birth defects. However, factors that can increase or reduce expressivity and penetrance of malformations in diabetic pregnancies remain poorly identified. All-trans retinoic acid (RA) plays crucial roles in embryogenesis. Here, we find that Cyp26a1, which encodes a key enzyme for catabolic inactivation of RA required for tight control of local RA concentrations, is significantly down-regulated in embryos of diabetic mice. Embryonic tissues expressing Cyp26a1 show reduced efficiency of RA clearance. Diabetes-exposed embryos are thus sensitized to RA and more vulnerable to the deleterious effects of increased RA signalling. Susceptibility to RA teratogenesis is further potentiated in embryos with a pre-existing genetic defect of RA metabolism. Increasing RA clearance efficiency by a pre-conditioning approach can counteract the increased susceptibility to RA teratogenesis in embryos of diabetic mice. Our findings provide new insight into gene-environment interactions that influence individual risk in manifestation of diabetes-related birth defects, and shed light on the environmental risk factors and genetic variants for a stratified medicine approach to screen diabetic women of childbearing age and assess risk of birth defects during pregnancy.