DNA methylation patterns change dynamically during mammalian development and lineage specification, yet scarce information is available about how DNA methylation affects gene expression profiles upon differentiation. Here we determine genome-wide transcription profiles during undirected differentiation of severely hypomethylated (Dnmt1−/−) embryonic stem cells (ESCs) as well as ESCs completely devoid of DNA methylation (Dnmt1−/−;Dnmt3a−/−;Dnmt3b−/− or TKO) and assay their potential to transit in and out of the ESC state. We find that the expression of only few genes mainly associated with germ line function and the X chromosome is affected in undifferentiated TKO ESCs. Upon initial differentiation as embryoid bodies (EBs) wild type, Dnmt1−/− and TKO cells downregulate pluripotency associated genes and upregulate lineage specific genes, but their transcription profiles progressively diverge upon prolonged EB culture. While Oct4 protein levels are completely and homogeneously suppressed, transcription of Oct4 and Nanog is not completely silenced even at late stages in both Dnmt1−/− and TKO EBs. Despite late wild type and Dnmt1−/− EBs showing a much higher degree of concordant expression, after EB dissociation and replating under pluripotency promoting conditions both Dnmt1−/− and TKO cells, but not wild type cells rapidly revert to expression profiles typical of undifferentiated ESCs. Thus, while DNA methylation seems not to be critical for initial activation of differentiation programs, it is crucial for permanent restriction of developmental fate during differentiation.