Low levels of oxygen (O 2 ) occur naturally in developing embryos. Cells respond to their hypoxic microenvironment by stimulating several hypoxia-inducible factors (and other molecules that mediate O 2 homeostasis), which then coordinate the development of the blood, vasculature, placenta, nervous system, and other organs. Furthermore, embryonic stem and progenitor cells frequently occupy hypoxic 'niches' and low O 2 regulates their differentiation. Recent work has revealed an important link between factors involved in regulating stem/progenitor cell behaviour and hypoxiainducible factors, which provides a molecular framework for hypoxic control of differentiation and cell fate. These findings have important implications for the development of therapies for tissue regeneration and disease.