Mesenchymal stem cells (MSC) are capable of differentiating into bone, fat, cartilage, tendon and other organ progenitor cells. Despite the abundance of MSC within the organism, little is known about their in vivo properties or about their corresponding in vivo niches. We therefore isolated MSC from spongy (cancellous) bone biopsies of healthy adults. When compared with the surrounding marrow, a fourfold higher number of colony-forming units was found within the tight meshwork of trabecular bone surface. At these sites, oxygen concentrations range from 1% to 7%. In MSC cultured at oxygen as low as 3%, rates for cell death and hypoxia-induced gene transcription remained unchanged, while in vitro proliferative lifespan was significantly increased, with about 10 additional population doublings before reaching terminal growth arrest. However, differentiation capacity into adipogenic progeny was diminished and no osteogenic differentiation was detectable at 3% oxygen. In turn, MSC that had previously been cultured at 3% oxygen could subsequently be stimulated to successfully differentiate at 20% oxygen. These data support our preliminary finding that primary MSC are enriched at the surface of spongy bone. Low oxygen levels in this location provide a milieu that extends cellular lifespan and furthermore is instructive for the stemness of MSC allowing proliferation upon stimulation while suppressing differentiation.