UTX (also known as KDM6A) encodes a histone H3K27 demethylase and is an important tumour suppressor that is frequently mutated in human cancers1. However, as the demethylase activity of UTX is often dispensable for mediating tumour suppression and developmental regulation2–8, the underlying molecular activity of UTX remains unknown. Here we show that phase separation of UTX underlies its chromatin-regulatory activity in tumour suppression. A core intrinsically disordered region (cIDR) of UTX forms phase-separated liquid condensates, and cIDR loss caused by the most frequent cancer mutation of UTX is mainly responsible for abolishing tumour suppression. Deletion, mutagenesis and replacement assays of the intrinsically disordered region demonstrate a critical role of UTX condensation in tumour suppression and embryonic stem cell differentiation. As shown by reconstitution in vitro and engineered systems in cells, UTX recruits the histone methyltransferase MLL4 (also known as KMT2D) to the same condensates and enriches the H3K4 methylation activity of MLL4. Moreover, UTX regulates genome-wide histone modifications and high-order chromatin interactions in a condensation-dependent manner. We also found that UTY, the Y chromosome homologue of UTX with weaker tumour-suppressive activity, forms condensates with reduced molecular dynamics. These studies demonstrate a crucial biological function of liquid condensates with proper material states in enabling the tumour-suppressive activity of a chromatin regulator.