DNA methylation and hydroxymethylation have been implicated in normal development and differentiation, but our knowledge is limited about the genome-wide distribution of 5-methylcytosine (5 mC) and 5-hydroxymethylcytosine (5 hmC) during cellular differentiation. Using an in vitro model system of gradual differentiation of human embryonic stem (hES) cells into ventral midbrain-type neural precursor cells and terminally into dopamine neurons, we observed dramatic genome-wide changes in 5 mC and 5 hmC patterns during lineage commitment. The 5 hmC pattern was dynamic in promoters, exons and enhancers. DNA hydroxymethylation within the gene body was associated with gene activation. The neurogenesis-related genes NOTCH1, RGMA and AKT1 acquired 5 hmC in the gene body and were up-regulated during differentiation. DNA methylation in the promoter was associated with gene repression. The pluripotency-related genes POU5F1, ZFP42 and HMGA1 acquired 5 mC in their promoters and were down-regulated during differentiation. Promoter methylation also acted as a locking mechanism to maintain gene silencing. The mesoderm development-related genes NKX2-8, TNFSF11 and NFATC1 acquired promoter methylation during neural differentiation even though they were already silenced in hES cells. Our findings will help elucidate the molecular mechanisms underlying lineage-specific differentiation of pluripotent stem cells during human embryonic development.