Epigenetic modification of the mammalian genome by DNA methylation (5-methylcytosine) has a profound impact on chromatin structure, gene expression and maintenance of cellular identity. The recent demonstration that members of the Ten-eleven translocation (Tet) family of proteins can convert 5-methylcytosine to 5-hydroxymethylcytosine raised the possibility that Tet proteins are capable of establishing a distinct epigenetic state. We have recently demonstrated that Tet1 is specifically expressed in murine embryonic stem (ES) cells and is required for ES cell maintenance. Using chromatin immunoprecipitation coupled with high-throughput DNA sequencing, here we show in mouse ES cells that Tet1 is preferentially bound to CpG-rich sequences at promoters of both transcriptionally active and Polycomb-repressed genes. Despite an increase in levels of DNA methylation at many Tet1-binding sites, Tet1 depletion does not lead to downregulation of all the Tet1 targets. Interestingly, although Tet1-mediated promoter hypomethylation is required for maintaining the expression of a group of transcriptionally active genes, it is also involved in repression of Polycomb-targeted developmental regulators. Tet1 contributes to silencing of this group of genes by facilitating recruitment of PRC2 to CpG-rich gene promoters. Thus, our study not only establishes a role for Tet1 in modulating DNA methylation levels at CpG-rich promoters, but also reveals a dual function of Tet1 in promoting transcription of pluripotency factors as well as participating in the repression of Polycomb-targeted developmental regulators.