Alternative transcription (AT) expands transcriptome diversity by generating multiple transcript isoforms from a single gene and affects a large fraction of animal genes. Misregulation of AT has been associated with human diseases including cancer. However, whether AT plays a role in the evolution of unique developmental gene functions remains unknown. Here, we show that a conserved Zic family segmentation gene, odd-paired, evolved a separate function as the determinant of head-to-tail polarity in moth flies via AT. The moth fly Clogmia albipunctata (Psychodidae) lacks genes that specify anterior development in other flies. Using expression profiling of anterior and posterior embryo halves and stage-specific transcriptome analyses, we identified alternative maternal and zygotic odd-paired transcripts in Clogmia embryos. The maternal transcript (Cal-opaMat) was localized at the anterior pole of freshly laid eggs and knockdown of Cal-opaMat led to mirror-image duplication of the embryo’s tail end and germ cells. The zygotic transcript (Cal-opaZyg) encoded a slightly larger protein with additional N-terminal 20 amino acids, was expressed during the blastoderm stage, and required for segmentation. However, when expressed posteriorly in preblastoderm Clogmia embryos, both Cal-opaMat and Cal-opaZyg induced mirror-image duplication of the embryo’s head. AT and isoform-specific expression of odd-paired was conserved in the sand fly Lutzomyia longipalpis (Psychodidae). Other fly species lacked the maternal odd-paired transcript variant but posterior injection of odd-paired mRNA from these species into Clogmia embryos also induced double heads. These results show that entirely new developmental gene functions can evolve via AT. Given that AT is a widespread phenomenon, its role in the evolution of gene regulatory networks deserves more attention.