Despite insights into the molecular pathways regulating hypoxia-induced gene expression, it is not known which cell types accomplish oxygen sensing during neo-vasculogenesis. We have developed a humanized mouse model of endothelial and mesenchymal progenitor co-transplantation to delineate the cellular compartments responsible for hypoxia response during vasculogenesis. Mesenchymal stem/progenitor cells (MSPCs) accumulated nuclear hypoxia-inducible transcription factor (HIF)-1α earlier and more sensitively than endothelial colony forming progenitor cells (ECFCs) in vitro and in vivo. Hypoxic ECFCs showed reduced function in vitro and underwent apoptosis within 24h in vivo when used without MSPCs. Surprisingly, only in MSPCs did pharmacologic or genetic inhibition of HIF-1α abrogate neo-vasculogenesis. HIF deletion in ECFCs caused no effect. ECFCs could be rescued from hypoxia-induced apoptosis by HIF-competent MSPCs resulting in the formation of patent perfused human vessels. Several angiogenic factors need to act in concert to partially substitute mesenchymal HIF-deficiency. Results demonstrate that ECFCs require HIF-competent vessel wall progenitors to initiate vasculogenesis in vivo and to bypass hypoxia-induced apoptosis. We describe a novel mechanistic role of MSPCs as oxygen sensors promoting vasculogenesis thus underscoring their importance for the development of advanced cellular therapies.