Transcriptional repression of Nanog is an important hallmark of stem cell differentiation. Chromatin modifications have been linked to the epigenetic profile of the Nanog gene, but whether chromatin organization actually plays a causal role in Nanog regulation is still unclear. Here, we report that the formation of a chromatin loop in the Nanog locus is concomitant to its transcriptional downregulation during human NTERA-2 cell differentiation. We found that two Alu elements flanking the Nanog gene were bound by the aryl hydrocarbon receptor (AhR) and the insulator protein CTCF during cell differentiation. Such binding altered the profile of repressive histone modifications near Nanog likely leading to gene insulation through the formation of a chromatin loop between the two Alu elements. Using a dCAS9-guided proteomic screening, we found that interaction of the histone methyltransferase PRMT1 and the chromatin assembly factor CHAF1B with the Alu elements flanking Nanog was required for chromatin loop formation and Nanog repression. Therefore, our results uncover a chromatin-driven, retrotransposon-regulated mechanism for the control of Nanog expression during cell differentiation.