Dysfunction or death of photoreceptors is the primary cause of vision loss in retinal and macular degenerative diseases. As photoreceptors have an intimate relationship with the retinal pigment epithelium (RPE) for exchange of macromolecules, removal of shed membrane discs and retinoid recycling, an improved understanding of the development of the photoreceptor-RPE complex will allow better design of gene- and cell-based therapies. To explore the epigenetic contribution to retinal development we generated conditional knockout alleles of DNA methyltransferase 1 (Dnmt1) in mice. Conditional Dnmt1 knockdown in early eye development mediated by Rx-Cre did not produce lamination or cell fate defects, except in cones; however, the photoreceptors completely lacked outer segments despite near normal expression of phototransduction and cilia genes. We also identified disruption of RPE morphology and polarization as early as E15.5. Defects in outer segment biogenesis were evident with Dnmt1 exon excision only in RPE, but not when excision was directed exclusively to photoreceptors. We detected a reduction in DNA methylation of LINE1 elements (a measure of global DNA methylation) in developing mutant RPE as compared with neural retina, and of Tuba3a, which exhibited dramatically increased expression in mutant retina. These results demonstrate a unique function of DNMT1-mediated DNA methylation in controlling RPE apicobasal polarity and neural retina differentiation. We also establish a model to study the epigenetic mechanisms and signaling pathways that guide the modulation of photoreceptor outer segment morphogenesis by RPE during retinal development and disease.