Embryonic stem cells (ESCs) are characterized by their unique properties of self-renewal and pluripotency. In order to realize their potential for regenerative medicine, the mechanisms that control ESC fate need to be fully understood. Heparan sulfate (HS) is a highly sulfated polysaccharide and its synthesis involves various enzymes, among them the glycosyltransferase EXT1, which polymerizes the HS chain. HS interacts with numerous proteins including growth factors and morphogens and thereby regulates important developmental processes in invertebrates and vertebrates. HS is present abundantly on the ESC surface, but its function in ESC self-renewal, pluripotency and developmental signaling is not known. ESC self-renewal and differentiation are controlled by various heparin-binding growth factors and hence HS may be an important component in the modulation of ESC fate. Ablation of EXT1, a HS biosynthetic enzyme leads to HS deficiency in ESCs. EXT1-/- ESCs retain their self-renewal potential, but fail to transit from self-renewal to differentiation upon removal of Leukemia Inhibitory Factor. The aberrant cell fate commitment is caused by a defect in FGF signaling, which directly retains high expression of the pluripotency gene Nanog in the absence of HS. Furthermore, HS is required for normal ESC proliferation, survival and induction of mesoderm differentiation. Examination of developmental signaling pathways yielded defects in the BMP-Smad-Id signaling pathway, which directly underlie the aberrant expression of mesoderm-associated genes in EXT1-/- ESCs. Collectively, this study demonstrates that HS is an important modulator of ESC fate decisions: HS is required for the exit from self-renewal through facilitating FGF signaling and for mesoderm differentiation through modulation of BMP signaling.