Rat mesenchymal stem cells (rMSCs) represent a small portion of the cells in the stromal compartment of bone marrow and have the potential to differentiate into bone, cartilage, fat, and fibrous tissue. These mesenchymal progenitor cells were maintained as primary isolates and as subcultured cells in separate closed modular incubator chambers purged with either 95% air and 5% CO2 (20% or control oxygen) or 5% oxygen, 5% CO2, and 90% nitrogen (5% or low oxygen). At first passage, some cells from each oxygen condition were loaded into porous ceramic vehicles and implanted into syngeneic host animals in an in vivo assay for osteochondrogenesis. The remaining cells were continued in vitro in the same oxygen tension as for primary culture or were switched to the alternate condition. The first passage cells were examined for in vitro osteogenesis with assays involving the quantification of alkaline phosphatase activity and calcium and DNA content as well as by von Kossa staining to detect mineralization. Cultures maintained in low oxygen had a greater number of colonies as primary isolates and proliferated more rapidly throughout their time in vitro, as indicated by hemacytometer counts at the end of primary culture and increased DNA values for first passage cells. Moreover, rMSCs cultivated in 5% oxygen produced more bone than cells cultured in 20% oxygen when harvested and loaded into porous ceramic cubes and implanted into syngeneic host animals. Finally, markers for osteogenesis, including alkaline phosphatase activity, calcium content, and von Kossa staining, were elevated in cultures which had been in low oxygen throughout their cultivation time. Expression of these markers was usually increased above basal levels when cells were switched from control to low oxygen at first passage and decreased for cells switched from low to control oxygen. We conclude that rMSCs in culture function optimally in an atmosphere of reduced oxygen that more closely approximates documented in vivo oxygen tension. © 2001 Wiley-Liss, Inc.