Little progress has been made toward the use of embryonic stem (ES) cells to study and isolate skeletal muscle progenitors. This is due to the paucity of paraxial mesoderm formation during embryoid body (EB) in vitro differentiation and to the lack of reliable identification and isolation criteria for skeletal muscle precursors. Here we show that expression of the transcription factor Pax3 during embryoid body differentiation enhances both paraxial mesoderm formation and the myogenic potential of the cells within this population. Transplantation of Pax3-induced cells results in teratomas, however, indicating the presence of residual undifferentiated cells. By sorting for the PDGF-α receptor, a marker of paraxial mesoderm, and for the absence of Flk-1, a marker of lateral plate mesoderm, we derive a cell population from differentiating ES cell cultures that has substantial muscle regeneration potential. Intramuscular and systemic transplantation of these cells into dystrophic mice results in extensive engraftment of adult myofibers with enhanced contractile function without the formation of teratomas. These data demonstrate the therapeutic potential of ES cells in muscular dystrophy.