Why do axolotls retain a juvenile appearance throughout life?

Several salamanders, including the axolotl, retain juvenile characteristics as adults and are called paedomorphic.

The entire axolotl life cycle is spent under water, from birth to mating.

This trait probably arose due to the benefits of living in a relatively permanent and productive aquatic environment. To understand this, imagine a population of tiger salamanders that use ephemeral ponds for breeding and larval development. The advantage of an ephemeral habitat is that it probably does not contain fish that eat salamanders. However, ephermeral ponds require larvae to undergo metamorphosis to escape the aquatic habitat before it dries. Now imagine climatic or geological changes that cause ephermeral habitats to become more permanent, or new lake systems to form. Such habitats would presumably select for a paedomorphic life history. In the case of the axolotl, Lake Xochimilco, Mexico presumably provided a habitat that selected for a paedomorphic life history from an ancestral population of metamorphic tiger salamanders. These genetic changes happened so recently that axolotls maintain the ability to spontaneously metamorphose. Paedomorphosis is associated with mechanisms in the brain that regulate the release of hormones that normally bring about metamorphosis in amphibians.

To learn more:

Page RB, Boley M, Smith JJ, Voss SR. 2010. Microarray analysis of a salamander hopeful monster reveals transcriptional signatures of paedomorphic brain development. BMC Evolutionary Biology 10:199.
Voss, S.R. and J.J. Smith. 2005. Evolution of salamander life cycles: A major effect QTL contributes to both continuous and discrete variation for metamorphic timing. Genetics 170:275-181.
Voss, S.R and H.B. Shaffer. 1997. Adaptive evolution via a major gene effect: paedomorphosis in the Mexican axolotl. Proceedings of the National Academy of Sciences 94: 14185-14189.

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