Significance Human endogenous retroviruses (HERV) were incorporated into the genome over millions of years but are mostly inactive. HERV-K subtype HML-2 is the most recently incorporated and its incidental expression occurs in a variety of pathological conditions. However, its physiological role is not understood. We discovered that the envelope protein of this virus plays a critical role in early embryonic development. It is expressed at high levels on the surface of pluripotent stem cells and signals via direct binding to CD98HC, leading to activation of signaling pathways that regulate stem cell function. Down regulation of HML-2 env resulted in dissociation of the stem cell colonies and enhanced differentiation along neuronal pathways. Thus, HML-2 regulation is critical for human embryonic and neurodevelopment.