To investigate the role of histone H3K27 demethylase UTX in embryonic stem (ES) cell differentiation, we have generated UTX knockout (KO) and enzyme-dead knock-in male ES cells. Deletion of the X-chromosome-encoded UTX gene in male ES cells markedly decreases expression of the paralogous UTY gene encoded by Y chromosome, but has no effect on global H3K27me3 level, Hox gene expression, or ES cell self-renewal. However, UTX KO cells show severe defects in mesoderm differentiation and induction of Brachyury, a transcription factor essential for mesoderm development. Surprisingly, UTX regulates mesoderm differentiation and Brachyury expression independent of its enzymatic activity. UTY, which lacks detectable demethylase activity, compensates for the loss of UTX in regulating Brachyury expression. UTX and UTY bind directly to Brachyury promoter and are required for Wnt/β-catenin signaling-induced Brachyury expression in ES cells. Interestingly, male UTX KO embryos express normal levels of UTY and survive until birth. In contrast, female UTX KO mice, which lack the UTY gene, show embryonic lethality before embryonic day 11.5. Female UTX KO embryos show severe defects in both Brachyury expression and embryonic development of mesoderm-derived posterior notochord, cardiac, and hematopoietic tissues. These results indicate that UTX controls mesoderm differentiation and Brachyury expression independent of H3K27 demethylase activity, and suggest that UTX and UTY are functionally redundant in ES cell differentiation and early embryonic development.