Human embryonic stem cells (hESCs) have the potential to self-renew and generate multiple cell types, producing critical building blocks for tissue engineering and regenerative medicine applications. Here, we describe the efficient derivation and chondrogenic differentiation of mesenchymal-like cells from hESCs. These cells exhibit mesenchymal stem cell (MSC) surface markers, including CD29, CD44, CD105, and platelet-derived growth factor receptor-alpha. Under appropriate growth conditions, the hESC-derived cells proliferated without phenotypic changes and maintained MSC surface markers. The chondrogenic capacity of the cells was studied in pellet culture and after encapsulation in poly(ethylene glycol)-diacrylate (PEGDA) hydrogels with exogenous extracellular proteins or arginineglycine- aspartate (RGD)-modified PEGDA hydrogels. The hESC-derived cells exhibited growth factor- dependent matrix production in pellet culture but did not produce tissue characteristic of cartilage morphology. In PEGDA hydrogels containing exogenous hyaluronic acid or type I collagen, no significant cell growth or matrix production was observed. In contrast, when these cells were encapsulated in RGDmodified poly(ethylene glycol)hydrogels, neocartilage with basophilic extracellular matrix deposition was observed within 3 weeks of culture, producing cartilage-specific gene up-regulation and extracellular matrix production. Our results indicate that precursor cells characteristic of a MSC population can be cultured from differentiating hESCs through embryoid bodies, thus holding great promise for a potentially unlimited source of cells for cartilage tissue engineering.