Cells in the musculoskeletal system can respond to mechanical stimuli, supporting tissue homeostasis and remodeling. Recent studies have suggested that mechanical stimulation also influences the differentiation of MSCs, whereas the effect on embryonic cells is still largely unknown. In this study, we evaluated the influence of dynamic mechanical compression on chondrogenesis of bone marrow-derived MSCs and embryonic stem cell-derived (human embryoid body-derived [hEBd]) cells encapsulated in hydrogels and cultured with or without transforming growth factor beta-1 (TGF-beta1). Cells were cultured in hydrogels for up to 3 weeks and exposed daily to compression for 1, 2, 2.5, and 4 hours in a bioreactor. When MSCs were cultured, mechanical stimulation quantitatively increased gene expression of cartilage-related markers, Sox-9, type II collagen, and aggrecan independently from the presence of TGF-beta1. Extracellular matrix secretion into the hydrogels was also enhanced. When hEBd cells were cultured without TGF-beta1, mechanical compression inhibited their differentiation as determined by significant downregulation of cartilage-specific genes. However, after initiation of chondrogenic differentiation by administration of TGF-beta1, the hEBd cells quantitatively increased expression of cartilage-specific genes when exposed to mechanical compression, similar to the bone marrow-derived MSCs. Therefore, when appropriately directed into the chondrogenic lineage, mechanical stimulation is beneficial for further differentiation of stem cell tissue engineered constructs.