The Polycomb-repressive complex 2 (PRC2) is important for maintenance of stem cell pluripotency and suppression of cell differentiation by promoting histone H3 lysine 27 trimethylation (H3K27me3) and transcriptional repression of differentiation genes. Here we show that the tumour-suppressor protein BRCA1 interacts with the Polycomb protein EZH2 in mouse embryonic stem (ES) and human breast cancer cells. The BRCA1-binding region in EZH2 overlaps with the noncoding RNA (ncRNA)-binding domain, and BRCA1 expression inhibits the binding of EZH2 to the HOTAIR ncRNA. Decreased expression of BRCA1 causes genome-wide EZH2 re-targeting and elevates H3K27me3 levels at PRC2 target loci in both mouse ES and human breast cancer cells. BRCA1 deficiency blocks ES cell differentiation and enhances breast cancer migration and invasion in an EZH2-dependent manner. These results reveal that BRCA1 is a key negative modulator of PRC2 and that loss of BRCA1 inhibits ES cell differentiation and enhances an aggressive breast cancer phenotype by affecting PRC2 function.