Human mesenchymal stem cells (hMSCs) can be derived from various adult and fetal tissues. However, the quality of tissues for the isolation of adult and fetal hMSCs is donor dependent with a nonreproducible yield. In addition, tissue engineering and cell therapy require large-scale production of a pure population of lineage-restricted stem cells that can be easily induced to differentiate into a specific cell type. Therefore, human embryonic stem cells (hESCs) can provide an alternative, plentiful source for generation of reproducible hMSCs. We have developed efficient differentiation protocols for derivation of hMSCs from hESCs, including coculture with murine OP9 stromal cells and feeder layer-free system. Our protocols have resulted in the generation of up to 49% of hMSCs, which expressed CD105, CD90, CD29, and CD44. The hMSCs exhibited high adipogenic, chondrocytic, and osteogenic differentiation in vitro. The latter correlated with osteocalcin secretion and vascular endothelial growth factor (VEGF) production by the differentiating hMSCs. hMSC-derived osteoblasts further differentiated and formed ectopic bone in vivo, and induced the formation of blood vessels in Matrigel implants. Our protocol enables generation of a purified population of hESC-derived MSCs, with the potential of differentiating into several mesodermal lineages, and particularly into vasculogenesis-inducing osteoblasts, which can contribute to the development of bone repair protocols.