Regenerative medicine is predicated on understanding the mechanisms regulating development and applying these conditions to direct stem cell fate. Embryogenesis is guided by cell-cell and cell-matrix interactions, but it is unclear how these physical cues influence stem cells in culture. We used human embryonic stem cells (hESCs) to examine whether mechanical features of the extracellular microenvironment could differentially modulate mesoderm specification. We found that, on a hydrogel-based compliant matrix, hESCs accumulate β-catenin at cell-cell adhesions and show enhanced Wnt-dependent mesoderm differentiation. Mechanistically, Src-driven ubiquitination of E-cadherin by Cbl-like ubiquitin ligase releases P120-catenin to facilitate transcriptional activity of β-catenin, which initiates and reinforces mesoderm differentiation. By contrast, on a stiff hydrogel matrix, hESCs show elevated integrin-dependent GSK3 and Src activity that promotes β-catenin degradation and inhibits differentiation. Thus, we found that mechanical features of the microenvironmental matrix influence tissue-specific differentiation of hESCs by altering the cellular response to morphogens.