Mesenchymal stem cells (MSCs) are multipotent cells capable of differentiating into dopaminergic (DAergic) neurons, which is one of the major cell types damaged in Parkinson's disease (PD). For this reason, MSCs are considered a potential cell source for PD therapy. It has been proved that hypoxia is involved in the proliferation and differentiation of stem cells. In this study, we investigated the effect of hypoxia on MSC proliferation and DAergic neuronal differentiation. Our results demonstrate that 3% O₂ treatment can enhance rat MSC proliferation by upregulation of phosphorylated p38 MAPK and subsequent nuclear translocation of hypoxia inducible factor (HIF)-1α. During neural differentiation, 3% O₂ treatment increases the expression of HIF-1α, phosphorylated ERK and p38 MAPK. These changes are followed by promotion of neurosphere formation and further DAergic neuronal differentiation. Furthermore, we explored the physiological function of hypoxia-induced DAergic neurons from human fetal MSCs by transplanting them into parkinsonian rats. Grafts induced with hypoxia display more survival of DAergic neurons and greater amelioration of behavioral impairments. Altogether, these results suggest that hypoxia can promote MSC proliferation and DAergic neuronal differentiation, and benefit for intrastriatal transplantation. Therefore, this study may provide new perspectives in application of MSCs to clinical PD therapy.