Abstract Pelota (Pelo) is ubiquitously expressed, and its genetic deletion in mice leads to embryonic lethality at an early post-implantation stage. In the present study, we conditionally deleted Pelo and showed that PELO deficiency did not markedly affect the self-renewal of embryonic stem cells (ESCs) or their capacity to differentiate in teratoma assays. However, their differentiation into extraembryonic endoderm (ExEn) in embryoid bodies (EBs) was severely compromised. Conversely, forced expression of Pelo in ESCs resulted in spontaneous differentiation toward the ExEn lineage. Failure of Pelo-deficient ESCs to differentiate into ExEn was accompanied by the retained expression of pluripotency-related genes and alterations in expression of components of the bone morphogenetic protein (BMP) signaling pathway. Further experiments have also revealed that attenuated activity of BMP signaling is responsible for the impaired development of ExEn. The recovery of ExEn and down-regulation of pluripotent genes in BMP4-treated Pelo-null EBs indicate that the failure of mutant cells to down-regulate pluripotency-related genes in EBs is not a result of autonomous defect, but rather to failed signals from surrounding ExEn lineage that induce the differentiation program. In vivo studies showed the presence of ExEn in Pelo-null embryos at E6.5, yet embryonic lethality at E7.5, suggesting that PELO is not required for the induction of ExEn development, but rather for ExEn maintenance or for terminal differentiation toward functional visceral endoderm which provides the embryos with growth factors required for further development. Moreover, Pelo-null fibroblasts failed to reprogram toward induced pluripotent stem cells (iPSCs) due to inactivation of BMP signaling and impaired mesenchymal-to-epithelial transition. Thus, our results indicate that PELO plays an important role in the establishment of pluripotency and differentiation of ESCs into ExEn lineage through activation of BMP signaling.