Tendons regenerate and repair slowly and inefficiently after injury. Tendon-derived stem cells (TDSCs) have been isolated recently and have been shown to promote tendon repair. The ability to achieve sufficient numbers of cells for transplantation is essential for their clinical application. In this study, we aimed to study the effect of low oxygen (O(2)) tension (2%) on the clonogenicity, metabolic rate, DNA incorporation, population doubling time, β-galactosidase activity, immunophenotypes, multilineage differentiation potential, and tenocyte-like properties of human TDSCs (hTDSCs). hTDSCs were isolated from patellar tendon and characterized according to their adherence to plastic; colony-forming ability; multilineage differentiation potential; and high expression level of CD44, CD73, CD 90, and CD105 but low CD34, CD45, CD146, and Stro-1 at 20% O(2) tension. Low O(2) tension increased DNA incorporation but not metabolic rate of hTDSCs. It increased cell number 25% and the number of colonies but reduced the osteogenic, adipogenic, and chondrogenic differentiation potential of hTDSCs. The reduction in differentiation potential was associated with lower messenger RNA (mRNA) expression ratios of some lineage-related markers, including BGLAP, ALP, C/EBPα, PPARγ2, ACAN, and SOX9; the expression of a tendon-related marker, TNMD, was greater. There was no significant difference in the production of collagenous to noncollagenous protein ratio; the immunophenotypes and β-galactosidase activity were similar at 2% and 20% O(2) tension. Hypoxia-preconditioned hTDSCs could successfully differentiate at 20% O(2) tension, as shown by the return of the mRNA expression ratios of lineage-related markers to levels comparable to cells pre-incubated and differentiated at 20% O(2) tension. In conclusion, hypoxia is advantageous for efficient expansion of hTDSCs in vitro for tendon tissue engineering.