Fibroblast growth factor (FGF) signaling is implicated in the control of pluripotency and lineage differentiation of both human and mouse embryonic stem cells (mESCs). FGF4 dependent stimulation of ERK1/2 signaling triggers transition of pluripotent ESCs from self-renewal and lineage commitment. In this study, Sprouty 1 (Spry1) expression was observed in undifferentiated mESCs, where it modulated ERK1/2 activity. Spry1 was confirmed as dispensable for the maintenance of self-renewal. However, suppression of Spry1 expression and subsequent activation of ERK1/2 signaling promoted neural differentiation and inhibited endothelial differentiation of mESCs. Moreover, evidence is presented which indicates that SHP2, a major determinant of balance between mESC self-renewal and differentiation, directly regulates Spry1 activity to modulate ERK1/2 signaling and lineage-specific differentiation in mESCs. Our results show that Spry1 has an essential role in the lineage specific differentiation of mESCs.