In vitro manipulation of preimplantation mammalian embryos can influence differentiation and growth at later stages of development. In the mouse, culture of embryonic stem (ES) cells affects their totipotency and may give rise to fetal abnormalities. To investigate whether this is associated with epigenetic alterations in imprinted genes, we analysed two maternally expressed genes (Igf2r, H19) and two paternally expressed genes (Igf2, U2af1-rs1) in ES cells and in completely ES cell-derived fetuses. Altered allelic methylation patterns were detected in all four genes, and these were consistently associated with allelic changes in gene expression. All the methylation changes that had arisen in the ES cells persisted on in vivo differentiation to fetal stages. Alterations included loss of methylation with biallelic expression of U2af1-rs1, maternal methylation and predominantly maternal expression of Igf2, and biallelic methylation and expression of Igf2r. In many of the ES fetuses, the levels of H19 expression were strongly reduced, and this biallelic repression was associated with biallellic methylation of the H19 upstream region. Surprisingly, biallelic H19 repression was not associated with equal levels of Igf2 expression from both parental chromosomes, but rather with a strong activation of the maternal Igf2 allele. ES fetuses derived from two of the four ES lines appeared developmentally compromised, with polyhydramnios, poor mandible development and interstitial bleeding and, in chimeric fetuses, the degree of chimerism correlated with increased fetal mass. Our study establishes a model for how early embryonic epigenetic alterations in imprinted genes persist to later developmental stages, and are associated with aberrant phenotypes.