Morphogen gradients impart positional information to cells in a homogenous tissue field. Fgf8a, a highly conserved growth factor, has been proposed to act as a morphogen during zebrafish gastrulation. However, technical limitations have so far prevented direct visualization of the endogenous Fgf8a gradient and confirmation of its morphogenic activity. Here, we monitor Fgf8a propagation in the developing neural plate using a CRISPR/Cas9-mediated EGFP knock-in at the endogenous fgf8a locus. By combining sensitive imaging with single-molecule Fluorescence Correlation Spectroscopy (FCS), we demonstrate that Fgf8a, produced at the embryonic margin, propagates by diffusion through the extracellular space and forms a graded distribution towards the animal pole. Overlaying the Fgf8a gradient curve with expression profiles of its downstream targets determines the precise input-output relationship of Fgf8a-mediated patterning. Manipulation of the extracellular Fgf8a levels alters the signaling outcome, thus establishing Fgf8a as a bona fide morphogen during zebrafish gastrulation. Furthermore, by hindering Fgf8a diffusion, we demonstrate that extracellular diffusion of the protein from the source is critical for it to achieve its morphogenic potential.