Cellular differentiation entails loss of pluripotency and gain of lineage- and cell-type-specific characteristics. Using a murine system that progresses from stem cells to lineage-committed progenitors to terminally differentiated neurons, we analyzed DNA methylation and Polycomb-mediated histone H3 methylation (H3K27me3). We show that several hundred promoters, including pluripotency and germline-specific genes, become DNA methylated in lineage-committed progenitor cells, suggesting that DNA methylation may already repress pluripotency in progenitor cells. Conversely, we detect loss and acquisition of H3K27me3 at additional targets in both progenitor and terminal states. Surprisingly, many neuron-specific genes that become activated upon terminal differentiation are Polycomb targets only in progenitor cells. Moreover, promoters marked by H3K27me3 in stem cells frequently become DNA methylated during differentiation, suggesting context-dependent crosstalk between Polycomb and DNA methylation. These data suggest a model how de novo DNA methylation and dynamic switches in Polycomb targets restrict pluripotency and define the developmental potential of progenitor cells.