A subset of human peripheral blood mononuclear cells (PB-MNCs) differentiate into endothelial progenitor cells (EPCs) that participate in postnatal neovascularization. Although tissue ischemia can mobilize EPCs from bone marrow, the effects of hypoxia on differentiation and angiogenic function of EPCs are little known. We examined whether hypoxic conditioning would modulate differentiation and function of human PB-MNC-derived EPCs. A subset of PB-MNCs gave rise to EPC-like attaching (AT) cells under either normoxic or hypoxic conditions. However, hypoxia much enhanced the differentiation of AT cells from PB-MNCs compared with normoxia. AT cells released vascular endothelial growth factor (VEGF) protein and expressed CD31 and kinase insert domain receptor/VEGFR-2, endothelial lineage markers, on their surface, which were also enhanced by hypoxia. Both a neutralizing anti-VEGF mAb and a KDR-specific receptor tyrosine kinase inhibitor, SU1498, suppressed PB-MNC differentiation into EPC-like AT cells in a dose-dependent manner. Migration of AT cells in response to VEGF as examined by a modified Boyden chamber apparatus was also enhanced by hypoxia. Finally, in vivo neovascularization efficacy was significantly enhanced by in vitro hypoxic conditioning of AT cells when cells were transplanted into the ischemic hindlimb of immunodeficient nude rats. In conclusion, hypoxia directly stimulated differentiation of EPC-like AT cells from human PB-MNC culture. Moreover, hypoxic preconditioning of AT cells before in vivo transplantation is a useful means to enhance therapeutic vasculogenesis.