Nodal and Activin are morphogens of the TGFbeta superfamily of signaling molecules that direct differential cell fate decisions in a dose- and distance-dependent manner. During early embryonic development the Nodal/Activin pathway is responsible for the specification of mesoderm, endoderm, node, and mesendoderm. In contradiction to this drive towards cellular differentiation, the pathway also plays important roles in the maintenance of self-renewal and pluripotency in embryonic and epiblast stem cells. The molecular basis behind stem cell interpretation of Nodal/Activin signaling gradients and the undertaking of disparate cell fate decisions remains poorly understood. Here, we show that any perturbation of endogenous signaling levels in mouse embryonic stem cells leads to their exit from self-renewal towards divergent differentiation programs. Increasing Nodal signals above basal levels by direct stimulation with Activin promotes differentiation towards the mesendodermal lineages while repression of signaling with the specific Nodal/Activin receptor inhibitor SB431542 induces trophectodermal differentiation. To address how quantitative Nodal/Activin signals are translated qualitatively into distinct cell fates decisions, we performed chromatin immunoprecipitation of phospho-Smad2, the primary downstream transcriptional factor of the Nodal/Activin pathway, followed by massively parallel sequencing, and show that phospho-Smad2 binds to and regulates distinct subsets of target genes in a dose-dependent manner. Crucially, Nodal/Activin signaling directly controls the Oct4 master regulator of pluripotency by graded phospho-Smad2 binding in the promoter region. Hence stem cells interpret and carry out differential Nodal/Activin signaling instructions via a corresponding gradient of Smad2 phosphorylation that selectively titrates self-renewal against alternative differentiation programs by direct regulation of distinct target gene subsets and Oct4 expression.