Defects in development of the secondary palate, which arise from the embryonic first branchial arch (1-BA), can cause cleft palate (CP). Administration of 5-Aza-2′-deoxycytidine (AzaD), a demethylating agent, to pregnant mice on gestational day 9.5 resulted in complete penetrance of CP in fetuses. Several genes critical for normal palatogenesis were found to be upregulated in 1-BA, 12 h after AzaD exposure. MethylCap-Seq (MCS) analysis identified several differentially methylated regions (DMRs) in DNA extracted from AzaD-exposed 1-BAs. Hypomethylated DMRs did not correlate with the upregulation of genes in AzaD-exposed 1-BAs. However, most DMRs were associated with endogenous retroviral elements. Expression analyses suggested that interferon signaling was activated in AzaD-exposed 1-BAs. Our data, thus, suggest that a 12-h in utero AzaD exposure demethylates and activates endogenous retroviral elements in the 1-BA, thereby triggering an interferon-mediated response. This may result in the dysregulation of key signaling pathways during palatogenesis, causing CP.