The canonical Wnt/β-catenin signaling pathway plays a crucial role in the maintenance of the balance between proliferation and differentiation throughout embryogenesis and tissue homeostasis. β-Catenin, encoded by the Ctnnb1 gene, mediates an intracellular signaling cascade activated by Wnt. It also plays an important role in the maintenance of various types of stem cells including adult stem cells and cancer stem cells. However, it is unclear if β-catenin is required for the derivation of mouse embryo-derived stem cells. Here, we established β-catenin-deficient (β-cat(Δ/Δ)) mouse embryo-derived stem cells and showed that β-catenin is not essential for acquiring self-renewal potential in the derivation of mouse embryonic stem cells (ESCs). However, teratomas formed from embryo-derived β-cat(Δ/Δ) ESCs were immature germ cell tumors without multilineage differentiated cell types. Re-expression of functional β-catenin eliminated their neoplastic, transformed phenotype and restored pluripotency, thereby rescuing the mutant ESCs. Our findings demonstrate that β-catenin has pleiotropic effects in ESCs; it is required for the differentiation of ESCs and prevents them from acquiring tumorigenic character. These results highlight β-catenin as the gatekeeper in differentiation and tumorigenesis in ESCs.