Our knowledge of the destructive events that regulate axonal degeneration is rudimentary. Here, we examine the role of caspases and their endogenous inhibitor, the X-linked inhibitor of apoptosis protein (XIAP), in axonal degeneration of dorsal root ganglion (DRG) axons. We show that caspase-3, caspase-6, and caspase-9 are present in axons and are cleaved upon nerve growth factor (NGF) withdrawal. We observed that caspase-3 activity is high in NGF-withdrawn axons and that CASP3(-/-) axons are protected from degeneration. XIAP(-/-) DRG sensory neurons degenerate more rapidly and contain more active caspase-3 than their wild-type counterparts, indicating that axonal caspases are normally regulated by XIAP. Importantly, axonal XIAP levels drop sharply after NGF withdrawal; if XIAP levels are maintained by overexpression, axonal caspase-3 activation and axonal degeneration are suppressed. Finally, we show that XIAP(-/-) embryos have stunted dermal innervation. We propose that XIAP-mediated caspase inhibition plays an important role in regulating morphogenic events that shape the nervous system during development.