A major problem in gene therapy and tissue replacement is accessibility of tissue-specific stem cells. One solution is to isolate tissue-specific stem cells from differentiating embryonic stem (ES) cells. Here, we show that liver progenitor cells can be purified from differentiated ES cells using alpha-fetoprotein (AFP) as a marker. By knocking the green fluorescent protein (GFP) gene into the AFP locus of ES cells and differentiating the modified ES cells in vitro, a subpopulation of GFP(+) and AFP-expressing cells was generated. When transplanted into partially hepatectomized lacZ-positive ROSA26 mice, GFP(+) cells engrafted and differentiated into lacZ-negative and albumin-positive hepatocytes. Differentiation into hepatocytes also occurred after transplantation of GFP(+) cells in apolipoprotein-E- (ApoE) or haptoglobin-deficient mice as demonstrated by the presence of ApoE-positive hepatocytes and ApoE mRNA in the liver of ApoE-deficient mice or by haptoglobin in the serum and haptoglobin mRNA in the liver of haptoglobin-deficient mice. This study describes the first isolation of ES-cell-derived liver progenitor cells that are viable mediators of liver-specific functions in vivo.