Histone methylation is an important regulator of gene expression; its coordinated activity is critical in complex developmental processes such as hematopoiesis. Disruptor of telomere silencing 1-like (DOT1L) is a unique histone methyltransferase that specifically methylates histone H3 at lysine 79. We analyzed Dot1L-mutant mice to determine influence of this enzyme on embryonic hematopoiesis. Mutant mice developed more slowly than wild-type embryos and died between embryonic days 10.5 and 13.5, displaying a striking anemia, especially apparent in small vessels of the yolk sac. Further, a severe, selective defect in erythroid, but not myeloid, differentiation was observed. Erythroid progenitors failed to develop normally, showing retarded progression through the cell cycle, accumulation during G₀/G₁ stage, and marked increase in apoptosis in response to erythroid growth factors. GATA2, a factor essential for early erythropoiesis, was significantly reduced in Dot1L-deficient cells, whereas expression of PU.1, a transcription factor that inhibits erythropoiesis and promotes myelopoiesis, was increased. These data suggest a model whereby DOT1L-dependent lysine 79 of histone H3 methylation serves as a critical regulator of a differentiation switch during early hematopoiesis, regulating steady-state levels of GATA2 and PU.1 transcription, thus controlling numbers of circulating erythroid and myeloid cells.