The in vitro derived hepatocytes from human embryonic stem cells (hESC) is a promising tool to acquire improved knowledge of the cellular and molecular events underlying early human liver development under physiological and pathological conditions. Here we report a simple two-step protocol employing conditioned medium (CM) from human hepatocellular carcinoma cell line, HepG2 to generate functional hepatocyte-like cells from hESC. Immunocytochemistry, flow cytometry, quantitative RT-PCR, and biochemical analyses revealed that the endodermal progenitors appeared as pockets in culture, and the cascade of genes associated with the formation of definitive endoderm (HNF-3β, SOX-17, DLX-5, CXCR4) was consistent and in concurrence with the up-regulation of the markers for hepatic progenitors [alpha-feto protein (AFP), HNF-4α, CK-19, albumin, alpha-1-antitrypsin (AAT)], followed by maturation into functional hepatocytes [tyrosine transferase (TAT), tryptophan-2, 3-dioxygenase (TDO), glucose 6-phosphate (G6P), CYP3A4, CYP7A1]. We witnessed that the gene expression profile during this differentiation process recapitulated in vivo liver development demonstrating a gradual down-regulation of extra embryonic endodermal markers (SOX-7, HNF-1β, SNAIL-1, LAMININ-1, CDX2), and the generated hepatic cells performed multiple liver functions. Since prenatal alcohol exposure is known to provoke irreversible abnormalities in the fetal cells and developing tissues, we exposed in vitro generated hepatocytes to ethanol (EtOH) and found that EtOH treatment not only impairs the survival and proliferation, but also induces apoptosis and perturbs differentiation of progenitor cells into hepatocytes. This disruption was accompanied by alterations in the expression of genes and proteins involved in hepatogenesis. Our results provide new insights into the wider range of destruction caused by alcohol on the dynamic process of liver organogenesis. J. Cell. Biochem. 113: 19–30, 2012. © 2011 Wiley Periodicals, Inc.