Bone marrow-derived mesenchymal stem cells (MSCs) have demonstrated potential for regenerative medicine strategies. Knowledge of the way these cells respond to their environment in in vitro culture and after implantation in vivo is crucial for successful therapy. Oxygen tension plays a pivotal role in both situations. In vivo, a hypoxic environment can lead to apoptosis, but hypoxic preconditioning of MSCs and overexpression of prosurvival genes like Akt can reduce hypoxia-induced cell death. In cell culture, hypoxia can increase proliferation rates and enhance differentiation along the different mesenchymal lineages. Hypoxia also modulates the paracrine activity of MSCs, causing upregulation of various secretable factors, among which are important angiogenic factors such as vascular endothelial growth factor and interleukin-6 (IL6). Finally, hypoxia plays an important role in mobilization and homing of MSCs, primarily by its ability to induce stromal cell-derived factor-1 expression along with its receptor CXCR4. This article reviews the current literature on the effects of hypoxia on MSCs and aims to elucidate its potential role in regenerative medicine strategies.