Two FDA-approved agents, ferumoxides (Feridex®), a suspension of superparamagnetic iron oxide (SPIO) nanoparticles and protamine sulfate, a drug used to reverse heparin anticoagulation, can be complexed and used to label cells magnetically ex vivo. Labeling stem cells with ferumoxides–protamine sulfate (FePro) complexes allows for non-invasive monitoring by MRI. However, in order for stem cell trials or therapies to be effective, this labeling technique must not inhibit the ability of cells to differentiate. In this study, we examined the effect of FePro labeling on stem cell differentiation. Viability, phenotypic expression and differential capacity of FePro labeled CD34 + hematopoietic stem cells (HSC) and mesenchymal stem cells (MSC) were compared with unlabeled control cells. Colony-forming unit (CFU) assays showed that the capacity to differentiate was equivalent for labeled and unlabeled HSC. Furthermore, labeling did not alter expression of surface phenotypic markers (CD34, CD31, CXCR4, CD20, CD3 and CD14) on HSC, as measured by flow cytometry. SDF-1-induced HSC migration and HSC differentiation to dendritic cells were also unaffected by FePro labeling. Both FePro-labeled and unlabeled MSC were cultured in chondrogenesis-inducing conditions. Alcian blue staining for proteoglycans revealed similar chondrogenic differentiation for both FePro-labeled and unlabeled cells. Furthermore, collagen X proteins, indicators of cartilage formation, were detected at similar levels in both labeled and unlabeled cell pellets. Prussian blue staining confirmed that cells in labeled pellets contained iron oxide, whereas cells in unlabeled pellets did not. It is concluded that FePro labeling does not alter the function or differentiation capacity of HSC and MSC. These data increase confidence that MRI studies of FePro-labeled HSC or MSC will provide an accurate representation of in vivo trafficking of unlabeled cells. Copyright © 2005 John Wiley & Sons, Ltd.