Gene targeting in embryonic stem (ES) cells has been used to mutate the murine DNA methyltransferase gene. ES cell lines homozygous for the mutation were generated by consecutive targeting of both wild-type alleles; the mutant cells were viable and showed no obvious abnormalities with respect to growth rate or morphology, and had only trace levels of DNA methyltransferase activity. A quantitative end-labeling assay showed that the level of m5C in the DNA of homozygous mutant cells was about one-third that of wild-type cells, and Southern blot analysis after cleavage of the DNA with a methylation-sensitive restriction endonuclease revealed substantial demethylation of endogenous retroviral DNA. The mutation was introduced into the germline of mice and found to cause a recessive lethal phenotype. Homozygous embryos were stunted, delayed in development, and did not survive past mid-gestation. The DNA of homozygous embryos showed a reduction of the level of m5C similar to that of homozygous ES cells. These results indicate that while a 3-fold reduction in levels of genomic m5C has no detectable effect on the viability or proliferation of ES cells in culture, a similar reduction of DNA methylation in embryos causes abnormal development and embryonic lethality.