Psychiatric disorders arise due to an interplay of genetic and environmental factors, including stress. Studies in rodents have shown that mutants for Disrupted-In-Schizophrenia-1 (DISC1), a well-accepted genetic risk factor for mental illness, display abnormal behaviours in response to stress, but the mechanisms through which DISC1 affects stress responses remain poorly understood. Using two lines of zebrafish homozygous mutant for disc1, we investigated behaviour and functioning of the hypothalamic-pituitary-interrenal (HPI) axis, the fish equivalent of the hypothalamic-pituitary-adrenal (HPA) axis. Here, we show that the role of DISC1 in stress responses is evolutionarily conserved and that DISC1 is essential for normal functioning of the HPI axis. Adult zebrafish homozygous mutant for disc1 show aberrant behavioural responses to stress. Our studies reveal that in the embryo, disc1 is expressed in neural progenitor cells of the hypothalamus, a conserved region of the vertebrate brain that centrally controls responses to environmental stressors. In disc1 mutant embryos, proliferating rx3+ hypothalamic progenitors are not maintained normally and neuronal differentiation is compromised: rx3-derived ff1b+ neurons, implicated in anxiety-related behaviours, and corticotrophin releasing hormone (crh) neurons, key regulators of the stress axis, develop abnormally, and rx3-derived pomc+ neurons are disorganised. Abnormal hypothalamic development is associated with dysfunctional behavioural and neuroendocrine stress responses. In contrast to wild type siblings, disc1 mutant larvae show altered crh levels, fail to upregulate cortisol levels when under stress and do not modulate shoal cohesion, indicative of abnormal social behaviour. These data indicate that disc1 is essential for normal development of the hypothalamus and for the correct functioning of the HPA/HPI axis.