Thymopoiesisis regulated by the thymic microenvironment, of which epithelial cells are the major components. Both cortical and medullary thymic epithelial cells (TECs) have been shown to arise from a common progenitor cell. Here we show for the first time that mouse embryonic stem cells (mESCs) can be selectively induced in vitro to differentiate into cells that have the phenotype of thymic epithelial progenitors (TEPs). When placed in vivo, these mESC-derived TEPs self-renew, develop into TECs, and reconstitute the normal thymic architecture. Functionally, these ESC-derived TEPs enhanced thymocyte regeneration after bone marrow transplantation and increased the number of functional naive splenic T cells. In addition to providing a model to study the molecular events underlying thymic epithelial cell development, the ability to selectively induce the development of TEPs in vitro from mESCs has important implications regarding the prevention and/or treatment of primary and secondary T-cell immunodeficiencies.