Oxygen tension is an important component of microenvironment for the differentiation of embryonic stem cells including neural lineage. However, the comprehensive influence of hypoxia on neural differentiation during embryonic neural development has not yet been examined. In this study, we investigated the effect of low oxygen levels (5% O(2)), or hypoxia, in two stages of neural differentiation in vitro: (1) inducing mouse embryonic stem cells into neural stem cells (NSCs); and then (2) inducing NSCs into neural progenitor cells in neurospheres. In the first stage, NSCs generation was reduced under hypoxia. Less mature morphological changes (including neural marker) of NSCs were observed, suggesting the prevention of early differentiation under hypoxic conditions. Thus undifferentiated stem cells were maintained in this stage. However, in the second stage, hypoxia induced neural differentiation in neurospheres. Nevertheless, non-neural progenitor cell formation, such as mesoderm progenitor cell lines or epithelial cell lines, was restricted by low oxygen tension. Our results demonstrate that hypoxia is essential for regulating neural differentiation and show the different effects on NSC differentiation dependent on the time-course of NSC development. In the early stage of NSCs induction, hypoxia inhibits neural differentiation and maintains the undifferentiated state; in the later stage of NSCs induction, hypoxia induces neural differentiation. Our study may contribute to the development of new insights for expansion and control of neural differentiation.