Background: Pluripotent embryonic stem cells (ESCs) have the unique ability to differentiate into every cell type and to self-renew. These characteristics correlate with a distinct nuclear architecture, epigenetic signatures enriched for active chromatin marks and hyperdynamic binding of structural chromatin proteins. Recently, several chromatin-related proteins have been shown to regulate ESC pluripotency and/or differentiation, yet the role of the major heterochromatin proteins in pluripotency is unknown. Results: Here we identify Heterochromatin Protein 1β (HP1β) as an essential protein for proper differentiation, and, unexpectedly, for the maintenance of pluripotency in ESCs. In pluripotent and differentiated cells HP1β is differentially localized and differentially associated with chromatin. Deletion of HP1β, but not HP1α, in ESCs provokes a loss of the morphological and proliferative characteristics of embryonic pluripotent cells, reduces expression of pluripotency factors and causes aberrant differentiation. However, in differentiated cells, loss of HP1β has the opposite effect, perturbing maintenance of the differentiation state and facilitating reprogramming to an induced pluripotent state. Microscopy, biochemical fractionation and chromatin immunoprecipitation reveal a diffuse nucleoplasmic distribution, weak association with chromatin and high expression levels for HP1β in ESCs. The minor fraction of HP1β that is chromatin-bound in ESCs is enriched within exons, unlike the situation in differentiated cells, where it binds heterochromatic satellite repeats and chromocenters. Conclusions: We demonstrate an unexpected duality in the role of HP1β: it is essential in ESCs for maintaining pluripotency, while it is required for proper differentiation in differentiated cells. Thus, HP1β function both depends on, and regulates, the pluripotent state.