Cytosine methylation in vertebrates is important for the regulation of gene activity, genomic stability, and chromatin structure; differences in the DNA methylation status are associated with imprinting phenomena, development, and carcinogenesis. Methylation signals are interpreted by protein factors that contain methyl-CpG-binding domains (MBDs). Mutations in one such protein, MeCP2, can cause Rett syndrome, a severe progressive neurodevelopmental disorder. We have determined the structure of the MBD of the human methylation-dependent transcriptional regulator MBD1 bound to a methylated DNA. DNA binding induces the folding of a long loop that contributes a major DNA interface, establishing a novel mode of DNA binding. The methyl groups at the methylation site are recognized through extensive hydrophobic contacts with aliphatic and aromatic portions of arginine, tyrosine, and serine residues that are totally conserved among the MBD family. Discrimination of the CG sequence is due to the same arginine and tyrosine residues. The structure indicates how MBD may access nucleosomal DNA without encountering steric interference from core histones. It also suggests that some residues of MeCP2 that are mutated in Rett syndrome are located at the protein-DNA interface, providing a structural basis to understand the consequence of these mutations.