Little is known about how growth factors control tissue stem cell survival and proliferation. We analyzed mice with a null mutation of Shp2 (Ptpn11), a key component of receptor tyrosine kinase signaling. Null embryos die peri-implantation, much earlier than mice that express an Shp2 truncation. Shp2 null blastocysts initially develop normally, but they subsequently exhibit inner cell mass death, diminished numbers of trophoblast giant cells, and failure to yield trophoblast stem (TS) cell lines. Molecular markers reveal that the trophoblast lineage, which requires fibroblast growth factor-4 (FGF4), is specified but fails to expand normally. Moreover, deletion of Shp2 in TS cells causes rapid apoptosis. We show that Shp2 is required for FGF4-evoked activation of the Src/Ras/Erk pathway that culminates in phosphorylation and destabilization of the proapoptotic protein Bim. Bim depletion substantially blocks apoptosis and significantly restores Shp2 null TS cell proliferation, thereby establishing a key mechanism by which FGF4 controls stem cell survival.