Stem cells reside in specialized microenvironments or 'niches' that regulate their function. In vitro studies using hypoxic culture conditions (<5% O2) have revealed strong regulatory links between O2 availability and functions of stem and precursor cells. Although some stem cells are perivascular, others may occupy hypoxic niches and be regulated by O2 gradients. However, the underlying mechanisms remain unclear. Here, we show that hypoxia inducible factor-1α (HIF-1α), a principal mediator of hypoxic adaptations, modulates Wnt/β-catenin signalling in hypoxic embryonic stem (ES) cells by enhancing β-catenin activation and expression of the downstream effectors LEF-1 and TCF-1. This regulation extends to primary cells, including isolated neural stem cells (NSCs), and is not observed in differentiated cells. In vivo, Wnt/β-catenin activity is closely associated with low O2 regions in the subgranular zone of the hippocampus, a key NSC niche. Hif-1α deletion impairs hippocampal Wnt-dependent processes, including NSC proliferation, differentiation and neuronal maturation. This decline correlates with reduced Wnt/β-catenin signalling in the subgranular zone. O2 availability, therefore, may have a direct role in stem cell regulation through HIF-1α modulation of Wnt/β-catenin signalling.