The emergence of craniofacial skeletal elements, and of the jaw in particular, was a crucial step in the evolution of higher vertebrates. Most facial bones and cartilage are generated during embryonic development by cranial neural crest cells, while an osteochondrogenic fate is suppressed in more posterior neural crest cells. Key players in this process are Hox genes, which suppress osteochondrogenesis in posterior neural crest derivatives. How this specific pattern of osteochondrogenic competence is achieved remains to be elucidated. Here we demonstrate that Hox gene expression and osteochondrogenesis are controlled by epigenetic mechanisms. Ezh2, which is a component of polycomb repressive complex 2 (PRC2), catalyzes trimethylation of lysine 27 in histone 3 (H3K27me3), thereby functioning as transcriptional repressor of target genes. Conditional inactivation of Ezh2 does not interfere with localization of neural crest cells to their target structures, neural development, cell cycle progression or cell survival. However, loss of Ezh2 results in massive derepression of Hox genes in neural crest cells that are usually devoid of Hox gene expression. Accordingly, craniofacial bone and cartilage formation is fully prevented in Ezh2 conditional knockout mice. Our data indicate that craniofacial skeleton formation in higher vertebrates is crucially dependent on epigenetic regulation that keeps in check inhibitors of an osteochondrogenic differentiation program.