Embryonic stem (ES) cells have a potential to differentiate into various progenitor cells. Here we investigated the differentiation capacity of mouse ES cells into hepatocytes both in vitro and in vivo. During the culture of embryoid bodies (EBs) derived from ES cells, albumin (ALB) messenger RNA (mRNA) was expressed within 12 days after removal of leukemia inhibitory factor, and alpha-fetoprotein (AFP) mRNA was observed within 9 days without additional exogenous growth factors. In ES cells and early EBs, by contrast, neither ALB mRNA nor AFP mRNA was observed. ALB protein was first detected at day 15 and the level increased with the culture period. The differentiation of EBs facilitated the synthesis of urea with the culture period, whereas early EBs and ES cells produced no urea. These results suggest that cultured EBs contain hepatocytes capable of producing ALB and urea. ES cells and the isolated cells from EBs were transplanted through portal vein to the liver after 30% partial hepatectomy of female mice pretreated with 2-acetylaminofluorene. Four weeks after transplantation with isolated cells from day-9 EBs, ES-derived cells containing Y-chromosome in the liver were positive for ALB (0.2% of total liver cells), whereas teratoma was found in mice transplanted with ES cells or EBs up to day 6. The incidence of teratoma was decreased with the culture duration and no teratoma was observed in the liver transplanted with isolated cells from day-9 EBs. In conclusion, our in vitro and in vivo experiments revealed that cultured EBs contain functional hepatocytes or hepatocyte-like cells.