Mammalian genomes undergo epigenetic modifications, including cytosine methylation by DNA methyltransferases (DNMTs). Oxidation of 5-methylcytosine by the Ten-eleven translocation (TET) family of dioxygenases can lead to demethylation1,2,3. Although cytosine methylation has key roles in several processes such as genomic imprinting and X-chromosome inactivation, the functional significance of cytosine methylation and demethylation in mouse embryogenesis remains to be fully determined4,5,6,7,8,9. Here we show that inactivation of all threeTetgenes in mice leads to gastrulation phenotypes, including primitive streak patterning defects in association with impaired maturation of axial mesoderm and failed specification of paraxial mesoderm, mimicking phenotypes in embryos with gain-of-function Nodal signalling10. Introduction of a single mutant allele ofNodalin theTetmutant background partially restored patterning, suggesting that hyperactive Nodal signalling contributes to the gastrulation failure ofTetmutants. Increased Nodal signalling is probably due to diminished expression of theLefty1andLefty2genes, which encode inhibitors of Nodal signalling. Moreover, reduction inLeftygene expression is linked to elevated DNA methylation, as both Lefty-Nodal signalling and normal morphogenesis are largely restored inTet-deficient embryos when theDnmt3aandDnmt3bgenes are disrupted. Additionally, a point mutation inTetthat specifically abolishes the dioxygenase activity causes similar morphological and molecular abnormalities as the null mutation. Taken together, our results show that TET-mediated oxidation of 5-methylcytosine modulates Lefty-Nodal signalling by promoting demethylation in opposition to methylation by DNMT3A and DNMT3B. These findings reveal a fundamental epigenetic mechanism featuring dynamic DNA methylation and demethylation crucial to regulation of key signalling pathways in early body plan formation.