We present a novel two-step protocol for the differentiation of embryonic stem (ES) cells into the hepatic lineage. Differentiated hepatocyte-like cells express genes and proteins characteristic for endodermal and hepatic cells and acquire a functional hepatic phenotype as demonstrated by albumin secretion and glycogen storage. During differentiation, alpha-fetoprotein, albumin, transthyretin, alpha-1-antitrypsin, cytochrome P450 subunits 2b9 and 2b13 and tyrosine aminotransferase transcripts are upregulated. Quantitative RT-PCR data revealed a fetal hepatic phenotype corresponding to day 13-14 of liver development. Terminally differentiated hepatocyte-like cells show a bi-nucleated, cuboidal morphology labeled by albumin, alpha-1-antitrypsin, liver amylase, dipeptidyl peptidase IV, c-met and cytokeratin 18. ES-derived intermediate cell types transiently and partially co-express nestin with albumin and alpha-fetoprotein, respectively, but not cytokeratin 19. This finding suggests an ES-derived potential hepatic progenitor cell type, which is partially nestin-, albumin- and alpha-fetoprotein-positive, but cytokeratin 19-negative.