N6-methyladenosine (m6A) is the most abundant internal modification on mammalian messenger RNA. It is installed by a writer complex and can be reversed by erasers such as the fat mass and obesity-associated protein FTO. Despite extensive research, the primary physiological substrates of FTO in mammalian tissues and development remain elusive. Here, we show that FTO mediates m6A demethylation of long-interspersed element-1 (LINE1) RNA in mouse embryonic stem cells (mESCs), regulating LINE1 RNA abundance and the local chromatin state, which in turn modulates the transcription of LINE1-containing genes. FTO-mediated LINE1 RNA m6A demethylation also plays regulatory roles in shaping chromatin state and gene expression during mouse oocyte and embryonic development. Our results suggest broad effects of LINE1 RNA m6A demethylation by FTO in mammals.