The Wnt signal-transduction pathway induces the nuclear translocation of membrane-bound β-catenin (Catnb) and has a key role in cell-fate determination. Tight somatic regulation of this signal is essential, as uncontrolled nuclear accumulation of β-catenin can cause developmental defects and tumorigenesis in the adult organism. The adenomatous polyposis coli gene (APC) is a major controller of the Wnt pathway and is essential to prevent tumorigenesis in a variety of tissues and organs. Here, we have investigated the effect of different mutations in Apc on the differentiation potential of mouse embryonic stem (ES) cells. We provide genetic and molecular evidence that the ability and sensitivity of ES cells to differentiate into the three germ layers is inhibited by increased doses of β-catenin by specific Apc mutations. These range from a severe differentiation blockade in Apc alleles completely deficient in β-catenin regulation to more specific neuroectodermal, dorsal mesodermal and endodermal defects in more hypomorphic alleles. Accordingly, a targeted oncogenic mutation in Catnb also affects the differentiation potential of ES cells. Expression profiling of wildtype and Apc-mutated teratomas supports the differentiation defects at the molecular level and pinpoints a large number of downstream structural and regulating genes. Chimeric experiments showed that this effect is cell-autonomous. Our results imply that constitutive activation of the Apc/β-catenin signaling pathway results in differentiation defects in tissue homeostasis, and possibly underlies tumorigenesis in the colon and other self-renewing tissues.