Dmrt1 (doublesex and mab-3 related transcription factor 1) is a conserved transcriptional regulator of male differentiation required for testicular development in vertebrates. Here, we show that in mice of the 129Sv strain, loss of Dmrt1 causes a high incidence of teratomas, whereas these tumors do not form in Dmrt1 mutant C57BL/6J mice. Conditional gene targeting indicates that Dmrt1 is required in fetal germ cells but not in Sertoli cells to prevent teratoma formation. Mutant 129Sv germ cells undergo apparently normal differentiation up to embryonic day 13.5 (E13.5), but some cells fail to arrest mitosis and ectopically express pluripotency markers. Expression analysis and chromatin immunoprecipitation identified DMRT1 target genes, whose missexpression may underlie teratoma formation. DMRT1 indirectly activates the GDNF coreceptor Ret, and it directly represses the pluripotency regulator Sox2. Analysis of human germ cell tumors reveals similar gene expression changes correlated to DMRT1 levels. Dmrt1 behaves genetically as a dose-sensitive tumor suppressor gene in 129Sv mice, and natural variation in Dmrt1 activity can confer teratoma susceptibility. This work reveals a genetic link between testicular dysgenesis, pluripotency regulation, and teratoma susceptibility that is highly sensitive to genetic background and to gene dosage.