Histone H3K4 methylation is associated with active genes and, along with H3K27 methylation, is part of a bivalent chromatin mark that typifies poised developmental genes in embryonic stem cells (ESCs). However, its functional roles in ESC maintenance and differentiation are not established. Here we show that mammalian Dpy-30, a core subunit of the SET1/MLL histone methyltransferase complexes, modulates H3K4 methylation in vitro, and directly regulates chromosomal H3K4 trimethylation (H3K4me3) throughout the mammalian genome. Depletion of Dpy-30 does not affect ESC self-renewal, but significantly alters the differentiation potential of ESCs, particularly along the neural lineage. The differentiation defect is accompanied by defects in gene induction and in H3K4 methylation at key developmental loci. Our results strongly indicate an essential functional role for Dpy-30 and SET1/MLL complex-mediated H3K4 methylation, as a component of the bivalent mark, at developmental genes during the ESC fate transitions.