Osteoarthritis primarily affects the articular cartilage of synovial joints. Cell and/or cartilage replacement is a promising therapy, provided there is access to appropriate tissue and sufficient numbers of articular chondrocytes. Embryonic stem cells (ESCs) represent a potentially unlimited source of chondrocytes and tissues as they can generate a broad spectrum of cell types under appropriate conditions in vitro. Here, we demonstrate that mouse ESC-derived chondrogenic mesoderm arises from a Flk-1(-)/Pdgfrα(+) (F(-)P(+)) population that emerges in a defined temporal pattern following the development of an early cardiogenic F(-)P(+) population. Specification of the late-arising F(-)P(+) population with BMP4 generated a highly enriched population of chondrocytes expressing genes associated with growth plate hypertrophic chondrocytes. By contrast, specification with Gdf5, together with inhibition of hedgehog and BMP signaling pathways, generated a population of non-hypertrophic chondrocytes that displayed properties of articular chondrocytes. The two chondrocyte populations retained their hypertrophic and non-hypertrophic properties when induced to generate spatially organized proteoglycan-rich cartilage-like tissue in vitro. Transplantation of either type of chondrocyte, or tissue generated from them, into immunodeficient recipients resulted in the development of cartilage tissue and bone within an 8-week period. Significant ossification was not observed when the tissue was transplanted into osteoblast-depleted mice or into diffusion chambers that prevent vascularization. Thus, through stage-specific manipulation of appropriate signaling pathways it is possible to efficiently and reproducibly derive hypertrophic and non-hypertrophic chondrocyte populations from mouse ESCs that are able to generate distinct cartilage-like tissue in vitro and maintain a cartilage tissue phenotype within an avascular and/or osteoblast-free niche in vivo.