Chromobox homolog 3 (Cbx3/heterochromatin protein 1γ [HP1γ]) stimulates cell differentiation, but its mechanism is unknown. We found that Cbx3 binds to gene promoters upon differentiation of murine embryonic stem cells (ESCs) to neural progenitor cells (NPCs) and recruits the Mediator subunit Med26. RNAi knockdown of either Cbx3 or Med26 inhibits neural differentiation while up-regulating genes involved in mesodermal lineage decisions. Thus, Cbx3 and Med26 together ensure the fidelity of lineage specification by enhancing the expression of neural genes and down-regulating genes specific to alternative fates.