Tumor formation constitutes a major obstacle to the clinical application of embryonic stem cell–derived (ESC-derived) cells. In an attempt to find major extracellular signaling and intrinsic factors controlling tumorigenicity and therapeutic functionality of transplanted ESC-derived retinal progenitor cells (ESC-RPCs), we evaluated multiple kinds of ESC-RPCs in a mouse retinal degeneration model and conducted genome-wide gene expression profiling. We identified canonical WNT signaling as a critical determinant for the tumorigenicity and therapeutic function of ESC-RPCs. The function of WNT signaling is primarily mediated by TCF7, which directly induces expression of Sox2 and Nestin. Inhibition of WNT signaling, overexpression of dominant-negative Tcf7, and silencing Tcf7, Sox2, or Nestin all resulted in drastically reduced tumor formation and substantially improved retinal integration and visual preservation in mice. These results demonstrate that the WNT signaling cascade plays a critical role in modulating the tumorigenicity and functionality of ESC-derived progenitors.