Active demethylation of cytosine residues in the sperm genome before forming a functional zygotic nucleus is thought to be an important function of the oocyte cytoplasm for subsequent embryonic development in the mouse. Conversely, this event does not occur in the sheep or rabbit zygote and occurs only partially in the cow. The aim of this study was to investigate the effect of limited methylation reprogramming in the normal sheep embryo on reprogramming somatic nuclei. Sheep fibroblast somatic nuclei were partially demethylated after electrofusion with recipient sheep oocytes and undergo a stepwise passive loss of DNA methylation during early development, as determined by 5-methylcytosine immunostaining on interphase embryonic nuclei. A similar decrease takes place with in vivo-derived sheep embryos up to the eight-cell stage, although nuclear transfer embryos exhibit a consistently higher level of methylation at each stage. Between the eight-cell and blastocyst stages, DNA methylation levels in nuclear transfer embryos are comparable with those derived in vivo, but the distribution of methylated DNA is abnormal in a high proportion. By correlating DNA methylation with developmental potential at individual stages, our results suggest that somatic nuclei that do not undergo rapid reorganization of their DNA before the first mitosis fail to develop within two to three cell cycles and that the observed methylation defects in early cleavage stages more likely occur as a direct consequence of failed nuclear reorganization than in failed demethylation capacity. However, because only embryos with reorganized chromatin appear to survive the 16-cell and morula stages, failure to demethylate the trophectoderm cells of the blastocyst is likely to directly impact on developmental potential by altering programmed patterns of gene expression in extra-embryonic tissues. Thus, both remodeling of DNA and epigenetic reprogramming appear critical for development of both fertilized and nuclear transfer embryos.