A key issue to be addressed in stem cell biology is the molecular signaling mechanism controlling embryonic stem (ES) cell pluripotency. Stem cell properties are dictated by specific transcription factors and epigenetic processes such as DNA methylation and chromatin remodeling. Several cytokines/growth factors have been identified as critical ES cell regulators. However, there is a gap in our knowledge of the intracellular signaling pathways linking extracellular signals to transcriptional regulation in ES cells. This short review discusses the physiological role of Shp2, a cytoplasmic tyrosine phosphatase, in the molecular switch governing ES cell self-renewal versus differentiation. Shp2 promotes ES cell differentiation, mainly through bi-directional modulation of Erk and Stat3 pathways. Deletion of Shp2 in mouse ES cells results in more efficient self-renewal. This observation provides the impetus to develop Shp2 inhibitors for maintenance and amplification of ES cells in culture.