Thyroid hormone is necessary for cochlear development and auditory function, but the factors that control these processes are poorly understood. Previous evidence indicated that in mice, the serum supply of thyroid hormone is augmented within the cochlea itself by type 2 deiodinase, which amplifies the level of T₃, the active form of thyroid hormone, before the onset of hearing. We now report that type 3 deiodinase, a thyroid hormone-inactivating enzyme encoded by Dio3, is expressed in the immature cochlea before type 2 deiodinase. Dio3−/− mice display auditory deficits and accelerated cochlear differentiation, contrasting with the retardation caused by deletion of type 2 deiodinase. The Dio3 mRNA expression pattern in the greater epithelial ridge, stria vascularis, and spiral ganglion partly overlaps with that of thyroid hormone receptor β (TRβ), the T₃ receptor that is primarily responsible for auditory development. The proposal that type 3 deiodinase prevents premature stimulation of TRβ was supported by deleting TRβ, which converted the Dio3−/− cochlear phenotype from one of accelerated to one of delayed differentiation. The results indicate a protective role for type 3 deiodinase in hearing. The auditory system illustrates the considerable extent to which tissues can autoregulate their developmental response to thyroid hormone through both type 2 and 3 deiodinases.