Human embryonic stem cells (hESCs) rely on fibroblast growth factor and Activin-Nodal signaling to maintain their pluripotency. However, Activin-Nodal signaling is also known to induce mesendoderm differentiation. The mechanisms by which Activin-Nodal signaling can achieve these contradictory functions remain unknown. Here, we demonstrate that Smad-interacting protein 1 (SIP1) limits the mesendoderm-inducing effects of Activin-Nodal signaling without inhibiting the pluripotency-maintaining effects exerted by SMAD2/3. In turn, Activin-Nodal signaling cooperates with NANOG, OCT4, and SOX2 to control the expression of SIP1 in hESCs, thereby limiting the neuroectoderm-promoting effects of SIP1. Similar results were obtained with mouse epiblast stem cells, implying that these mechanisms are evolutionarily conserved and may operate in vivo during mammalian development. Overall, our results reveal the mechanisms by which Activin-Nodal signaling acts through SIP1 to regulate the cell-fate decision between neuroectoderm and mesendoderm in the progression from pluripotency to primary germ layer differentiation.