Recent studies have demonstrated that adipose-derived mesenchymal cells (AMCs) offer great promise for cell-based therapies because of their ability to differentiate toward bone, cartilage, and fat. Given that cartilage is an avascular tissue and that mesenchymal cells experience hypoxia during prechondrogenic condensation in endochondral ossification, the goal of this study was to understand the influence of oxygen tension on AMC differentiation into bone and cartilage. In vitro chondrogenesis was induced using a three-dimensional micromass culture model supplemented with TGF-beta1. Collagen II production and extracellular matrix proteoglycans were assessed with immunohistochemistry and Alcian blue staining, respectively. Strikingly, micromasses differentiated in reduced oxygen tension (2% O(2)) showed markedly decreased chondrogenesis. Osteogenesis was induced using osteogenic medium supplemented with retinoic acid or vitamin D and was assessed with alkaline phosphatase activity and mineralization. AMCs differentiated in both 21 and 2% O(2) environments. However, osteogenesis was severely diminished in a low-oxygen environment. These data demonstrated that hypoxia strongly inhibits in vitro chondrogenesis and osteogenesis in AMCs.