Cytosine methylation at CpG dinucleotides is a critical epigenetic modification of mammalian genomes. CpG binding protein (CGBP) exhibits a unique DNA-binding specificity for unmethylated CpG motifs and is essential for early murine development. Embryonic stem cell lines deficient for CGBP were generated to further examine CGBP function. CGBP^−/− cells are viable but show an increased rate of apoptosis and are unable to achieve in vitro differentiation following removal of leukemia inhibitory factor from the growth media. Instead, CGBP^−/− embryonic stem cells remain undifferentiated as revealed by persistent expression of the pluripotent markers Oct4 and alkaline phosphatase. CGBP^−/− cells exhibit a 60 to 80% decrease in global cytosine methylation, including hypo-methylation of repetitive elements, single-copy genes, and imprinted genes. Total DNA methyltransferase activity is reduced by 30 to 60% in CGBP^−/− cells, and expression of the maintenance DNA methyltransferase 1 protein is similarly reduced. However, de novo DNA methyltransferase activity is normal. Nearly all aspects of the pleiotropic CGBP^−/− phenotype are rescued by introduction of a CGBP expression vector. Hence, CGBP is essential for normal epigenetic modification of the genome by cytosine methylation and for cellular differentiation, consistent with the requirement for CGBP during early mammalian development.