The dynamic interplay between the extracellular matrix and embryonic stem cells (ESCs) constitutes one of the key steps in understanding stem cell differentiation in vitro. Here we report a biologically-active laminin-111 fragment generated by matrix metalloproteinase 2 (MMP2) processing, which is highly up-regulated during differentiation. We show that the β1-chain–derived fragment interacts via α3β1-integrins, thereby triggering the down-regulation of MMP2 in mouse and human ESCs. Additionally, the expression of MMP9 and E-cadherin is up-regulated in mouse ESCs—key players in the epithelial-to-mesenchymal transition. We also demonstrate that the fragment acts through the α3β1-integrin/extracellular matrix metalloproteinase inducer complex. This study reveals a previously unidentified role of laminin-111 in early stem cell differentiation that goes far beyond basement membrane assembly and a mechanism by which an MMP2-cleaved laminin fragment regulates the expression of E-cadherin, MMP2, and MMP9.