DNA methylation patterns are established in early embryogenesis and are critical for cellular differentiation. To investigate the role of CG methylation in potential enhancer formation, we assessed H3K4me1 modification in murine embryonic fibroblasts (MEFs) derived from the DNA methylation mutant Lsh(-/-) mice. We report here de novo formation of putative enhancer elements at CG hypomethylated sites that can be dynamically altered. We found a subset of differentially enriched H3K4me1 regions clustered at neuronal lineage genes and overlapping with known cis-regulatory elements present in brain tissue. Reprogramming of Lsh(-/-) MEFs into induced pluripotent stem (iPS) cells leads to increased neuronal lineage gene expression of premarked genes and enhanced differentiation potential of Lsh(-/-) iPS cells toward the neuronal lineage pathway compared with WT iPS cells in vitro and in vivo. The state of CG hypomethylation and H3K4me1 enrichment is partially maintained in Lsh(-/-) iPS cells. The acquisition of H3K27ac and activity of subcloned fragments in an enhancer reporter assay indicate functional activity of several of de novo H3K4me1-marked sequences. Our results suggest a functional link of H3K4me1 enrichment at CG hypomethylated sites, enhancer formation, and cellular plasticity.