Unrepaired DNA damage during embryonic development can be potentially inherited by a large population of cells. However, the quality control mechanisms that minimize the contribution of damaged cells to developing embryos remain poorly understood. Here, we uncovered an ATR- and CHK1-mediated transcriptional response to replication stress (RS) in mouse embryonic stem cells (ESCs) that induces genes expressed in totipotent two-cell (2C) stage embryos and 2C-like cells. This response is mediated by Dux, a multicopy retrogene defining the cleavage-specific transcriptional program in placental mammals. In response to RS, DUX triggers the transcription of 2C-like markers such as murine endogenous retrovirus-like elements (MERVL) and Zscan4. This response can also be elicited by ETAA1-mediated ATR activation in the absence of RS. ATR-mediated activation of DUX requires GRSF1-dependent post-transcriptional regulation of Dux mRNA. Strikingly, activation of ATR expands ESCs fate potential by extending their contribution to both embryonic and extra-embryonic tissues. These findings define a novel ATR dependent pathway involved in maintaining genome stability in developing embryos by controlling ESCs fate in response to RS.