Donor-recipient cell interactions are essential for functional engraftment after nonautologous cell transplantation. During this process, transplant engraftment is characterized and defined by interactions between transplanted cells with local and recruited inflammatory cells. The outcome of these interactions determines donor cell fate. Here, we provide evidence that lineage-committed embryonic stem cell (ESC)-derived vascular progenitor cells are the target of major histocompatibility complex (MHC) class I-dependent, natural killer (NK) cell-mediated elimination in vitro and in vivo. Treatment with interferon γ was found to significantly upregulate MHC class I expression on ESC-derived vascular progenitor cells, rendering them less susceptible to syngeneic NK cell-mediated killing in vitro and enhancing their survival and differentiation potential in vivo. Furthermore, in vivo ablation of NK cells led to enhanced progenitor cell survival after transplantation into a syngeneic murine ischemic hindlimb model, providing additional evidence that NK cells mediate ESC-derived progenitor cell transplant rejection. These data highlight the importance of recipient immune-donor cell interactions, and indicate a functional role for MHC-I antigen expression during successful ESC-derived syngeneic transplant engraftment.