We established an efficient system for differentiation, expansion and isolation of hepatic progenitor cells from mouse embryonic stem (ES) cells and evaluated their capacity to repopulate injured liver. Using mouse ES cells transfected with the green fluorescent protein (GFP) reporter gene regulated by albumin (ALB) enhancer/promoter, we found that a serum-free chemically defined medium supports formation of embryoid bodies (EBs) and differentiation of hepatic lineage cells in the absence of exogenous growth factors or feeder cell layers. The first GFP+ cells expressing ALB were detected in close proximity to “beating” myocytes after 7 days of EB cultures. GFP+ cells increased in number, acquired hepatocyte-like morphology and hepatocyte-specific markers (i.e., ALB, AAT, TO, and G6P), and by 28 days represented more than 30% of cells isolated from EB outgrowths. The FACS-purified GFP+ cells developed into functional hepatocytes without evidence of cell fusion and participated in the repairing of diseased liver when transplanted into MUP-uPA/SCID mice. The ES cell-derived hepatocytes were responsive to normal growth regulation and proliferated at the same rate as the host hepatocytes after an additional growth stimulus from CCl4-induced liver injury. The transplanted GFP+ cells also differentiated into biliary epithelial cells. In conclusion, a highly enriched population of committed hepatocyte precursors can be generated from ES cells in vitro for effective cell replacement therapy. (HEPATOLOGY 2006;44:1478–1486.)