Vertebrate genomes are heavily methylated at cytosines in the sequence CpG. The biological role of this modification is probably mediated by DNA binding proteins that are either attracted to or repelled by methyl-CpG. MeCP2 is an abundant chromosomal protein that binds specifically to methylated DNA in vitro, and depends upon methyl-CpG for its chromosomal distribution in vivo. To assess the functional significance of MeCP2, the X-linked gene was mutated in male mouse embryonic stem (ES) cells using a promoterless gene-targeting construct containing a lacZ reporter gene. Mutant ES cells lacking MeCP2 grew with the same vigour as the parental line and were capable of considerable differentiation. Chimaeric embryos derived from several independent mutant lines, however, exhibited developmental defects whose severity was positively correlated with the contribution of mutant cells. The results demonstrate that MeCP2, like DNA methyltransferase, is dispensable in stem cells, but essential for embryonic development.