Elucidating how chromatin organization influences gene expression patterns and ultimately cell fate is fundamental to understanding development and disease. Here, we investigate the role of the histone variant H2AZ in embryonic stem (ES) cells because it plays an essential, but poorly understood function during development. Genome-wide analysis reveals that H2AZ is enriched at a large class of developmentally important genes whose promoters harbor bivalent histone modifications in a manner that is remarkably similar to the Polycomb group (PcG) protein Suz12. By using RNAi, we demonstrate a role for H2AZ in regulating target gene expression, find that H2AZ and PcG protein occupancy is interdependent at promoters, and further show that H2AZ is necessary for ES cell differentiation. Notably, H2AZ occupies a different subset of genes in lineage-committed cells suggesting that its dynamic redistribution is necessary for cell fate transitions. These results indicate that H2AZ, together with PcG proteins, may establish chromatin states necessary for the proper execution of developmental gene expression programs.