Placental development is profoundly influenced by oxygen (O₂) tension. Human cytotrophoblasts proliferate in vitro under low O₂ conditions but differentiate at higher O₂ levels, mimicking the developmental transition they undergo as they invade the placental bed to establish the maternal–fetal circulation in vivo. Hypoxia-inducible factor-1 (HIF-1), consisting of HIF-1α and ARNT subunits, activates many genes involved in the cellular and organismal response to O₂deprivation. Analysis of Arnt ^−/− placentas reveals an aberrant cellular architecture due to altered cell fate determination of Arnt ^−/− trophoblasts. Specifically, Arnt ^−/− placentas show greatly reduced labyrinthine and spongiotrophoblast layers, and increased numbers of giant cells. We further show that hypoxia promotes the in vitro differentiation of trophoblast stem cells into spongiotrophoblasts as opposed to giant cells. Our results clearly establish that O₂ levels regulate cell fate determination in vivo and that HIF is essential for mammalian placentation. The unique placental phenotype of Arnt ^−/− animals also provides an important tool for studying the disease of preeclampsia. Interestingly, aggregation of Arnt ^−/− embryonic stem (ES) cells with tetraploid wild-type embryos rescues their placental defects; however, these embryos still die from yolk sac vascular and cardiac defects.