INTRODUCTION. Bone marrow derived mesenchymal stem cells are a potential source of cells for the repair of articular cartilage defects. Hypoxia has been shown to improve chondrogenesis in adult stem cells. In this study we characterised bone marrow derived stem cells and investigated the effects of hypoxia on gene expression changes and chondrogenesis. MATERIALS AND METHODS. Adherent colony forming cells were isolated and cultured from the stromal component of bone marrow. The cells at passage 2 were characterised for stem cell surface epitopes, and then cultured as cell aggregates in chondrogenic medium under normoxic (20% oxygen) or hypoxic (5% oxygen) conditions for 14 days. Gene expression analysis, glycosoaminoglycan and DNA assays, and immunohistochemical staining were determined to assess chondrogenesis. RESULTS. Bone marrow derived adherent colony forming cells stained strongly for markers of adult mesenchymal stem cells including CD44, CD90 and CD105, and they were negative for the haematopoietic cell marker CD34 and for the neural and myogenic cell marker CD56. Interestingly, a high number of cells were also positive for the pericyte marker 3G5. Cell aggregates showed a chondrogenic response and in lowered oxygen there was increased matrix accumulation of proteoglycan, but less cell proliferation, which resulted in 3.2-fold more glycosoaminoglycan per DNA after 14 days of culture. In hypoxia there was increased expression of key transcription factor SOX6, and the expression of collagens II and XI, and aggrecan was also increased. DISCUSSION. Pericytes are a candidate stem cell in many tissue and our results show that bone marrow derived mesenchymal stem cells express the pericyte marker 3G5. The response to chondrogenic culture in these cells was enhanced by lowered oxygen tension, which up-regulated SOX6 and increased the synthesis and assembly of matrix during chondrogenesis. This has important implications for tissue engineering applications of bone marrow derived stem cells