Dicer is the enzyme that cleaves double-stranded RNA (dsRNA) into 21–25-nt-long species responsible for sequence-specific RNA-induced gene silencing at the transcriptional, post-transcriptional, or translational level. We disrupted the dicer-1 (dcr-1) gene in mouse embryonic stem (ES) cells by conditional gene targeting and generated Dicer-null ES cells. These cells were viable, despite being completely defective in RNA interference (RNAi) and the generation of microRNAs (miRNAs). However, the mutant ES cells displayed severe defects in differentiation both in vitro and in vivo. Epigenetic silencing of centromeric repeat sequences and the expression of homologous small dsRNAs were markedly reduced. Re-expression of Dicer in the knockout cells rescued these phenotypes. Our data suggest that Dicer participates in multiple, fundamental biological processes in a mammalian organism, ranging from stem cell differentiation to the maintenance of centromeric heterochromatin structure and centromeric silencing.