Hematopoietic malignancies are frequently associated with DNA hypomethylation but the molecular mechanisms involved in tumor formation remain poorly understood. Here we report that mice lacking Lsh develop leukemia associated with DNA hypomethylation and oncogene activation. Lsh is a member of the SNF2 chromatin remodeling family and is required for de novo methylation of genomic DNA. Mice that received Lsh deficient hematopoietic progenitors showed severe impairment of hematopoiesis, suggesting that Lsh is necessary for normal hematopoiesis. A subset of mice developed erythroleukemia, a tumor that does not spontaneously occur in mice. Tumor tissues were CpG hypomethylated and showed a modest elevation of the transcription factor PU.1, an oncogene that is crucial for Friend virus induced erythroleukemia. Analysis of Lsh(-/-) hematopoietic progenitors revealed widespread DNA hypomethylation at repetitive sequences and hypomethylation at specific retroviral elements within the PU.1 gene. Wild type cells showed Lsh and Dnmt3b binding at the retroviral elements located within the PU.1 gene. On the other hand, Lsh deficient cells had no detectable Dnmt3b association suggesting that Lsh is necessary for recruitment of Dnmt3b to its target. Furthermore, Lsh(-/-) hematopoietic precursors showed impaired suppression of retroviral elements in the PU.1 gene, an increase of PU.1 transcripts and protein levels. Thus DNA hypomethylation caused by Lsh depletion is linked to transcriptional upregulation of retroviral elements and oncogenes such as PU.1 which in turn may promote the development of erythroleukemia in mice.