Despite progress in our knowledge about pancreatic islet specification, most attempts at differentiating stem/progenitor cells into functional, transplantable beta cells have met only with moderate success thus far. A major challenge is the intrinsic simplicity of in vitro culture systems, which cannot approximate the physiological complexity of in vivo microenvironments. Oxygenation is a critical limitation of standard culture methods, and one of special relevance for the development of beta cells, known for their high O(2) requirements. Based on our understanding of islet physiology, we have tested the hypothesis that enhanced O(2) delivery (as provided by novel perfluorocarbon-based culture devices) may result in higher levels of beta-cell differentiation from progenitor cells in vitro. Using a mouse model of pancreatic development, we demonstrate that a physiological-like mode of O(2) delivery results in a very significant upregulation of endocrine differentiation markers (up to 30-fold for insulin one and 2), comparable to relevant in vivo controls. This effect was not observed by merely increasing environmental O(2) concentrations in conventional settings. Our findings indicate that O(2) plays an important role in the differentiation of beta cells from their progenitors and may open the door to more efficient islet differentiation protocols from embryonic and/or adult stem cells. Disclosure of potential conflicts of interest is found at the end of this article.