Alterations in DNA methylation occur during development, but the mechanisms by which they influence gene expression remain uncertain. There are few examples where modification of a single CpG dinucleotide directly affects transcription factor binding and regulation of a target gene in vivo. Here, we show that the erythroid transcription factor GATA-1 - that typically binds T/AGATA sites - can also recognise CGATA elements, but only if the CpG dinucleotide is unmethylated. We focus on a single CGATA site in the c-Kit gene which progressively becomes unmethylated during haematopoiesis. We observe that methylation attenuates GATA-1 binding and gene regulation in cell lines. In mice, converting the CGATA element to a TGATA site that cannot be methylated leads to accumulation of megakaryocyte-erythroid progenitors. Thus, the CpG dinucleotide is essential for normal erythropoiesis and this study illustrates how a single methylated CpG can directly affect transcription factor binding and cellular regulation.