Scientists have discovered the primary mechanism by which thalidomide causes malformed limbs in developing embryos.
This side-effect was recognised after thousands of affected children were born to mothers who had been prescribed the drug for morning sickness.
Research in the journal Science reveals that thalidomide binds to and renders inactive the protein cereblon, which is very important in limb formation.
This finding could help the development of safer thalidomide-like drugs.
Thalidomide can be effective in the treatment of certain cancers and leprosy, but the fact that it causes birth defects means that for women its use remains risky and controversial.
Medical researchers would therefore like to develop drugs that mimic the action of thalidomide, but do not affect limb development.
The research team, led by Takumi Ito from the Tokyo Institute of Technology in Japan, managed to isolate the negative effects of this "potentially useful" drug.
They set out to discover which target molecules thalidomide bound to in the body. They did this using tiny beads that extracted each individual molecule the drug bound to.
The scientists confirmed their conclusion by using genetic techniques to reduce the production of the cereblon protein in developing zebrafish and chick embryos.
The embryos with reduced cereblon had similar developmental defects to those that were treated with thalidomide.
"We [have shown] that cereblon... is a primary target of thalidomide teratogenicity" (or its ability to cause birth defects), the researchers wrote in their Science article.
Dr Ito told BBC News: "Although the mechanism for the teratogenic effect was made clear, the mechanism for its therapeutic effects remains unknown.
"[If we want to develop] a new drug devoid of teratogenic activity, it is important to understand [this] mechanism... this is what we are heading for."