In all eukaryotes, histone variants are incorporated into a subset of nucleosomes to create functionally specialized regions of chromatin. One such variant, H2A.Z, replaces histone H2A and is required for development and viability in all animals tested to date. However, the function of H2A.Z in development remains unclear. Here, we use ChIP-chip, genetic mutation, RNAi, and immunofluorescence microscopy to interrogate the function of H2A.Z (HTZ-1) during embryogenesis in Caenorhabditis elegans, a key model of metazoan development. We find that HTZ-1 is expressed in every cell of the developing embryo and is essential for normal development. The sites of HTZ-1 incorporation during embryogenesis reveal a genome wrought by developmental processes. HTZ-1 is incorporated upstream of 23% of C. elegans genes. While these genes tend to be required for development and occupied by RNA polymerase II, HTZ-1 incorporation does not specify a stereotypic transcription program. The data also provide evidence for unexpectedly widespread independent regulation of genes within operons during development; in 37% of operons, HTZ-1 is incorporated upstream of internally encoded genes. Fewer sites of HTZ-1 incorporation occur on the X chromosome relative to autosomes, which our data suggest is due to a paucity of developmentally important genes on X, rather than a direct function for HTZ-1 in dosage compensation. Our experiments indicate that HTZ-1 functions in establishing or maintaining an essential chromatin state at promoters regulated dynamically during C. elegans embryogenesis.