Human embryonic stem cells (hESCs) provide a novel source of hematopoietic and other cell populations suitable for gene therapy applications. Preclinical studies to evaluate engraftment of hESC-derived hematopoietic cells transplanted into immunodeficient mice demonstrate only limited repopulation. Expression of a drug-resistance gene, such as Tyr22-dihydrofolate reductase (Tyr22-DHFR), coupled to methotrexate (MTX) chemotherapy has the potential to selectively increase the engraftment of gene-modified, hESC-derived cells in mouse xenografts. Here, we describe the generation of Tyr22-DHFR-GFP-expressing hESCs that maintain pluripotency, produce teratomas and can differentiate into MTXr-hemato-endothelial cells. We demonstrate that MTX administered to nonobese diabetic/severe combined immunodeficient/IL-2Rgammac(null) (NSG) mice after injection of Tyr22-DHFR-hESC-derived cells significantly increases human CD34(+) and CD45(+) cell engraftment in the bone marrow (BM) and peripheral blood of transplanted MTX-treated mice. These results demonstrate that MTX treatment supports selective, long-term engraftment of Tyr22-DHFR cells in vivo, and provides a novel approach for combined human cell and gene therapy.