E-cadherin-mediated cell-cell adhesion is critical for naive pluripotency of cultured mouse embryonic stem cells (mESCs). E-cadherin-depleted mESC fail to downregulate their pluripotency program and are unable to initiate lineage commitment. To further explore the roles of cell adhesion molecules during mESC differentiation, we focused on p120 catenin (p120ctn). Although one key function of p120ctn is to stabilize and regulate cadherin-mediated cell-cell adhesion, it has many additional functions, including regulation of transcription and Rho GTPase activity. Here, we investigated the role of mouse p120ctn in early embryogenesis, mESC pluripotency and early fate determination. In contrast to the E-cadherin-null phenotype, p120ctn-null mESCs remained pluripotent, but their in vitro differentiation was incomplete. In particular, they failed to form cystic embryoid bodies and showed defects in primitive endoderm formation. To pinpoint the underlying mechanism, we undertook a structure-function approach. Rescue of p120ctn-null mESCs with different p120ctn wild-type and mutant expression constructs revealed that the long N-terminal domain of p120ctn and its regulatory domain for RhoA were dispensable, whereas its armadillo domain and interaction with E-cadherin were crucial for primitive endoderm formation. We conclude that p120ctn is not only an adaptor and regulator of E-cadherin, but is also indispensable for proper lineage commitment.