Whole-organ decellularization technology has emerged as a new alternative for the fabrication of bioartificial lungs. Embryonic stem cells (ESC) and induced pluripotent stem cells (iPSC) are potentially useful for recellularization since they can be directed to express phenotypic marker genes of lung epithelial cells. Normal pulmonary development takes place in a low oxygen environment ranging from 1 to 5%. By contrast, in vitro ESC and iPSC differentiation protocols are usually carried out at room-air oxygen tension. Here, we sought to determine the role played by oxygen tension on the derivation of Nkx2.1+ lung/thyroid progenitor cells from mouse ESC and iPSC. A step-wise differentiation protocol was used to generate Nkx2.1+ lung/thyroid progenitors under 20% and 5% oxygen tension. On day 12, gene expression analysis revealed that Nkx2.1 and Foxa2 (endodermal and early lung epithelial cell marker) were significantly upregulated at 5% oxygen tension in ESC and iPSC differentiated cultures compared to 20% oxygen conditions. In addition, quantification of Foxa2+Nkx2.1+Pax8- cells corresponding to the lung field, with exclusion of the potential thyroid fate identified by Pax8 expression, confirmed that the low physiologic oxygen tension exerted a significant positive effect on early pulmonary differentiation of ESC and iPSC. In conclusion, we found that 5% oxygen tension enhanced the derivation of lung progenitors from mouse ESC and iPSC compared to 20% room-air oxygen tension.