During differentiation of embryonic stem cells, chromatin reorganizes to 
establish cell type-specific expression programs. Here, we have dissected the 
linkages between DNA methylation (5mC), hydroxymethylation (5hmC), nucleosome 
repositioning, and binding of the transcription factor CTCF during this process. 
By integrating MNase-seq and ChIP-seq experiments in mouse embryonic stem cells 
(ESC) and their differentiated counterparts with biophysical modeling, we found 
that the interplay between these factors depends on their genomic context. The 
mostly unmethylated CpG islands have reduced nucleosome occupancy and are 
enriched in cell type-independent binding sites for CTCF. The few remaining 
methylated CpG dinucleotides are preferentially associated with nucleosomes. In 
contrast, outside of CpG islands most CpGs are methylated, and the average 
methylation density oscillates so that it is highest in the linker region 
between nucleosomes. Outside CpG islands, binding of TET1, an enzyme that 
converts 5mC to 5hmC, is associated with labile, MNase-sensitive nucleosomes. 
Such nucleosomes are poised for eviction in ESCs and become stably bound in 
differentiated cells where the TET1 and 5hmC levels go down. This process 
regulates a class of CTCF binding sites outside CpG islands that are occupied by 
CTCF in ESCs but lose the protein during differentiation. We rationalize this 
cell type-dependent targeting of CTCF with a quantitative biophysical model of 
competitive binding with the histone octamer, depending on the TET1, 5hmC, and 
5mC state.