In vitro disease modeling using pluripotent stem cells can be a fast track screening tool for toxicological testing of candidate drug molecules. Dimethyl sulfoxide (DMSO) is one of the most commonly used solvents in drug screening. In the present investigation, we exposed 14- to 21-day-old embryoid bodies (EBs) to three different concentrations of DMSO [0.01% (low dose), 0.1% (medium dose) and 1.0% (high dose)] to identify the safest dose that could effectively be used as solvent. We found that DMSO treatment substantially altered the morphology and attachment of cells in concurrence with a significant reduction in cell viability in a dose-dependent manner. Gene expression studies revealed a selective downregulation of key markers associated with stemness (Oct-4, Sox-2, Nanog and Rex-1); ectoderm (Nestin, TuJ1, NEFH and Keratin-15); mesoderm (HAND-1, MEF-2C, GATA-4 and cardiac-actin); and endoderm (SOX-17, HNF-3β, GATA-6 and albumin), indicating an aberrant and untimely differentiation trajectory. Furthermore, immunocytochemistry, flow cytometry and histological analyses demonstrated substantial decrease in the levels of albumin and CK-18 proteins coupled with a massive reduction in the number of cells positive for PAS staining, implicating reduced deposits of glycogen. Our study advocates for the first time that DMSO exposure not only affects the phenotypic characteristics but also induces significant alteration in gene expression, protein content and functionality of the differentiated hepatic cells. Overall, our experiments warrant that hESC-based assays can provide timely alerts about the outcome of widespread applications of DMSO as drug solvent, cryoprotectant and differentiating agent.