Dynamic regulation of histone methylation by methyltransferases and demethylases plays a central role in regulating the fate of embryonic stem (ES) cells. The histone H3K9 methyltransferase KMT1E, formerly known as ESET or Setdb1, is essential to embryonic development as the ablation of the Setdb1 gene results in peri-implantation lethality and prevents the propagation of ES cells. However, Setdb1-null blastocysts do not display global changes in H3K9 methylation or DNA methylation, arguing against a genome-wide defect. Here we show that conditional deletion of the Setdb1 gene in ES cells results in the upregulation of lineage differentiation markers, especially trophectoderm-specific factors, similar to effects observed upon loss of Oct3/4 expression in ES cells. We demonstrate that KMT1E deficiency in ES cells leads to a decrease in histone H3K9 methylation at and derepression of trophoblast-associated genes such as Cdx2. Furthermore, we find genes that are derepressed upon Setdb1 deletion to overlap with known targets of polycomb mediated repression, suggesting that KMT1E mediated H3K9 methylation acts in concert with polycomb controlled H3K27 methylation. Our studies thus demonstrate an essential role for KMT1E in the control of developmentally regulated gene expression programs in ES cells.