DNA methylation-mediated epigenetic regulation plays critical roles in regulating mammalian gene expression, but its role in normal brain function is not clear. Methyl-CpG binding protein 1 (MBD1), a member of the methylated DNA-binding protein family, has been shown to bind methylated gene promoters and facilitate transcriptional repression in vitro. Here we report the generation and analysis of MBD1^-/- mice. MBD1^-/- mice had no detectable developmental defects and appeared healthy throughout life. However, we found that MBD1^-/- neural stem cells exhibited reduced neuronal differentiation and increased genomic instability. Furthermore, adult MBD1^-/- mice had decreased neurogenesis, impaired spatial learning, and a significant reduction in long-term potentiation in the dentate gyrus of the hippocampus. Our findings indicate that DNA methylation is important in maintaining cellular genomic stability and is crucial for normal neural stem cell and brain functions.