Chondrogenesis occurs in vivo in a hypoxic environment, in which the hypoxia inducible factor 1, HIF-1, plays a regulatory role, possibly mediated through the transcription factor DEC1. We have analyzed the effect of hypoxia (1% oxygen) alone and in combination with insulin on the chondrogenic differentiation of the mouse embryonic stem cell line ATDC5. Hypoxic treatment alone induced early chondrogenesis as evidenced by enhanced expression of aggrecan and collagen II, whereas hypoxic incubation of insulin-treated cells delayed and suppressed insulin-mediated early chondrogenesis and almost completely blocked hypertrophic differentiation. Paradoxically, the transcriptional activation of DEC1 was invariably enhanced by the hypoxic exposure.