The primary embryonic axes in flies, frogs and fish are formed through translational regulation of localized transcripts before fertilization. In Drosophila melanogaster, the axes are established through the transport and translational regulation of gurken (grk) and bicoid (bcd) messenger RNA in the oocyte and embryo. Both transcripts are translationally silent while being localized within the oocyte along microtubules by cytoplasmic dynein. Once localized, grk is translated at the dorsoanterior of the oocyte to send a TGF- alpha signal to the overlying somatic cells. In contrast, bcd is translationally repressed in the oocyte until its activation in early embryos when it forms an anteroposterior morphogenetic gradient. How this differential translational regulation is achieved is not fully understood. Here, we address this question using ultrastructural analysis, super-resolution microscopy and live-cell imaging. We show that grk and bcd ribonucleoprotein (RNP) complexes associate with electron-dense bodies that lack ribosomes and contain translational repressors. These properties are characteristic of processing bodies (P bodies), which are considered to be regions of cytoplasm where decisions are made on the translation and degradation of mRNA. Endogenous grk mRNA forms dynamic RNP particles that become docked and translated at the periphery of P bodies, where we show that the translational activator Oo18 RNA-binding protein (Orb, a homologue of CEPB) and the anchoring factor Squid (Sqd) are also enriched. In contrast, an excess of grk mRNA becomes localized inside the P bodies, where endogenous bcd mRNA is localized and translationally repressed. Interestingly, bcd mRNA dissociates from P bodies in embryos following egg activation, when it is known to become translationally active. We propose a general principle of translational regulation during axis specification involving remodelling of transport RNPs and dynamic partitioning of different transcripts between the translationally active edge of P bodies and their silent core.