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 demethylation(1-3). 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 determined(4-9). Here we show that inactivation of all three Tet genes 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 signalling(10). Introduction of a single mutant allele of Nodal in the Tet mutant background partially restored patterning, suggesting that hyperactive Nodal signalling contributes to the gastrulation failure of Tet mutants. Increased Nodal signalling is probably due to diminished expression of the Lefty1 and Lefty2 genes, which encode inhibitors of Nodal signalling. Moreover, reduction in Lefty gene expression is linked to elevated DNA methylation, as both Lefty-Nodal signalling and normal morphogenesis are largely restored in Tet-deficient embryos when the Dnmt3a and Dnmt3b genes are disrupted. Additionally, a point mutation in Tet that 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.