The interactions between hematopoietic cells and the bone marrow (BM) microenvironment play a critical role in normal and malignant hematopoiesis and drug resistance. These interactions within the BM niche are unique and could be important for developing new therapies. Here, we describe the development of extramedullary bone and bone marrow using human mesenchymal stromal cells and endothelial colony-forming cells implanted subcutaneously into immunodeficient mice. We demonstrate the engraftment of human normal and leukemic cells engraft into the human extramedullary bone marrow. When normal hematopoietic cells are engrafted into the model, only discrete areas of the BM are hypoxic, whereas leukemia engraftment results in widespread severe hypoxia, just as recently reported by us in human leukemias. Importantly, the hematopoietic cell engraftment could be altered by genetical manipulation of the bone marrow microenvironment: Extramedullary bone marrow in which hypoxia-inducible factor 1α was knocked down in mesenchymal stromal cells by lentiviral transfer of short hairpin RNA showed significant reduction (50% ± 6%; P = .0006) in human leukemic cell engraftment. These results highlight the potential of a novel in vivo model of human BM microenvironment that can be genetically modified. The model could be useful for the study of leukemia biology and for the development of novel therapeutic modalities aimed at modifying the hematopoietic microenvironment.