Reactive aldehydes are common carcinogens. They are also by-products of several metabolic pathways and, without enzymatic catabolism, may accumulate and cause DNA damage. Ethanol, which is metabolised to acetaldehyde, is both carcinogenic and teratogenic in humans. Here we find that the Fanconi anaemia DNA repair pathway counteracts acetaldehyde-induced genotoxicity in mice. Our results show that the acetaldehyde-catabolising enzyme Aldh2 is essential for the development of Fancd2^−/− embryos. Nevertheless, acetaldehyde-catabolism-competent mothers (Aldh2^+/− ) can support the development of double-mutant (Aldh2^−/−Fancd2^−/− ) mice. However, these embryos are unusually sensitive to ethanol exposure in utero, and ethanol consumption by postnatal double-deficient mice rapidly precipitates bone marrow failure. Lastly, Aldh2^−/−Fancd2^−/− mice spontaneously develop acute leukaemia. Acetaldehyde-mediated DNA damage may critically contribute to the genesis of fetal alcohol syndrome in fetuses, as well as to abnormal development, haematopoietic failure and cancer predisposition in Fanconi anaemia patients.