Pluripotent embryonic stem (ES) cells are the most versatile cells, with the potential to differentiate into all types of cells. However, the cellular and molecular mechanisms responsible for their differentiation into specific lineages have not been elucidated. Recent studies in human ES cells have challenged the scientific community to focus research on the basic mechanisms of stem cell differentiation for their potential applications in regenerative medicine and cell-based therapies. The majority of studies thus far have focused on cells that are already committed to specific lineages. The current studies were designed to establish a system for investigating the mechanisms of cell fate determination starting from undifferentiated ES cells, to gain insight into events during the normally inaccessible period of development. Here we demonstrate that pluripotent ES cells can be programmed to differentiate into chondrocytes, the cartilage-producing cells, by co-culture with progenitor cells from the limb buds of the developing embryo. Almost 60%-80% of the cells exhibited phenotypic characteristics of mature chondrocytes and expressed genes such as sox9, collagen type II, and proteoglycans, which was accompanied by a decrease in ES cell-specific transcription factor Oct-4. Collagen type II, which is expressed in two different forms during chondrogenic differentiation due to the alternate splicing of mRNA, was also properly regulated. The studies presented here suggest that the signals produced by progenitor cells from the developing embryo can induce lineage-specific differentiation. The system described here may serve as an in vitro model to study the mechanisms of cell fate determination by stem cells.