The abnormal umbilical artery Doppler waveform represented by absent end-diastolic flow velocity (AEDFV) identifies a group of preterm small-for-gestational age fetuses that are at high risk of perinatal death due to chronic fetal hypoxia. The placental ischaemia that results from inadequate trophoblast invasion of spiral arterioles leads to an assumption of placental villous hypoxia, though an alternative explanation is that the placenta fails to adequately transfer oxygen to the fetus from the intervillous space. Because oxygen transport takes place within the terminal villi, we undertook the first detailed studies of villous ultrastructure structure and immunohistochemistry in order to determine the likely origin of fetal hypoxia in this condition. Terminal villi were examined ultrastructurally using transmission electron microscopy and by immunohistochemical localization of matrix molecules (laminin and collagens I, III and IV) and a marker of cell proliferation (MIB-1), in 16 small-for-gestational age pregnancies with AEDFV in the umbilical artery [deemed to have intrauterine growth restriction (IUGR)] and in 16 gestation age-matched controls. Terminal villi from the IUGR cases were smaller in diameter (P < 0.02) and had several abnormal features in comparison with the controls; increased syncytial nuclei (P < 0.01), reduced cytotrophoblast nuclei (P < 0.01), thickened basal lamina (P < 0.01), and increased stromal deposition of collagens and laminin. The amount of proliferating cytotrophoblast was reduced in the IUGR group (P < 0.014) and the degree of capillary erythrocyte congestion within terminal villous capillaries was increased (P < 0.001). Several of the structural differences in the terminal villi of the IUGR group such as reduced cytotrophoblast proliferation and stromal fibrosis are incompatible with the prevailing view of placental hypoxia in IUGR. Rather thickening of the basal lamina and congestion of the capillaries by erythrocytes are predicted to limit oxygen transfer from the intervillous space to the fetus and may represent an equilibration of oxygen tension between intervillous space and the terminal villi. Despite the known reduction in uteroplacental blood flow in IUGR, fetoplacental blood flow is compromised to a far greater extent in the presence of AEDFV such that maternal blood leaving the placenta has a higher oxygen content than under normal circumstances.