SOX2 plays an important role in early embryogenesis by cooperating with OCT4 in regulating gene expression in fertilized eggs, yet the precise mechanism through which SOX2 accomplishes this important function remains poorly understood. Here, we describe the identification of two nuclear localization signals (NLS) in SOX2 and the generation of a dominant-negative mutant (Dmu-mSox2) by mutating these two NLS in its high mobility group domain. Characterization of this mutant demonstrated that SOX2 shuttles between the cytoplasm and nucleus using these two NLS. The mutant has lost its ability to interact with OCT4, but remains competent to interact with wild-type SOX2. Functionally, Dmu-mSox2 is inactive and unable to cooperate with OCT4 in transactivating target promoters bearing its binding sites. However, Dmu-mSox2 is able to inhibit the activity of wild-type SOX2 and subsequently suppress the activity of downstream genes such as Oct4 and Nanog. When stably expressed in embryonic stem (ES) cells, Dmu-mSox2 triggered progressive doublings of cell ploidy (>8N), leading to differentiation into the trophectoderm lineage. Knockdown of Sox2 by small interfering RNA also induced trophectoderm differentiation and polyploid formation in mouse ES cells. These results suggest that SOX2 maintains stem cell pluripotency by shuttling between the nucleus and cytoplasm in cooperation with OCT4 to prevent trophectoderm differentiation and polyploid formation in ES cells.