Previous reports showed that embryonic stem (ES) cells contain hyperdynamic and globally transcribed chromatin-properties that are important for ES cell pluripotency and differentiation. Here, we demonstrate a role for undifferentiated embryonic cell transcription factor 1 (UTF1) in regulating ES cell chromatin structure. Using chromatin immunoprecipitation-on-chip analysis, we identified >1,700 UTF1 target genes that significantly overlap with previously identified Nanog, Oct4, Klf-4, c-Myc, and Rex1 targets. Gene expression profiling showed that UTF1 knock down results in increased expression of a large set of genes, including a significant number of UTF1 targets. UTF1 knock down (KD) ES cells are, irrespective of the increased expression of several self-renewal genes, Leukemia inhibitory factor (LIF) dependent. However, UTF1 KD ES cells are perturbed in their differentiation in response to dimethyl sulfoxide (DMSO) or after LIF withdrawal and display increased colony formation. UTF1 KD ES cells display extensive chromatin decondensation, reflected by a dramatic increase in nucleosome release on micrococcal nuclease (MNase) treatment and enhanced MNase sensitivity of UTF1 target genes in UTF1 KD ES cells. Summarizing, our data show that UTF1 is a key chromatin component in ES cells, preventing ES cell chromatin decondensation, and aberrant gene expression; both essential for proper initiation of lineage-specific differentiation of ES cells.