The chondrogenic differentiation of bone marrow‐derived human mesenchymal stem cells (MSCs) in a collagen type I hydrogel, which is in clinical use for matrix‐based autologous chondrocyte transplantation (ACT), was investigated. Collagen hydrogels with 2.5 × 105 MSCs/mL were fabricated and cultured for 3 weeks in a serum‐free, defined, chondrogenic differentiation medium containing 10 ng/mL TGF‐β1 or 100 ng/mL BMP‐2. Histochemistry revealed morphologically distinct, chondrocyte‐like cells, surrounded by a sulfated proteoglycan‐rich extracellular matrix in the TGF‐β1 and BMP‐2 treated group, with more elongated cells seen in the BMP‐2 treated group. Immunohistochemistry detected collagen type II (Col II) in the TGF‐β1 and BMP‐2 treated group. Collagen type X (Col X) staining was positive in the TGF‐β1 but only very weak in the BMP‐2 treated group. RT‐PCR analyses revealed a specific chondrogenic differentiation with the expression of the cartilage specific marker genes Col II, Col X, and aggrecan (AGN) in the TGF‐β1 and the BMP‐2 treated group, with earlier expression of these marker genes in the TGF‐β1 treated group. Interestingly, MSC‐gels cultured in DMEM with 10% FBS (control) indicated few isolated chondrocyte‐like cells but no expression of Col II or Col X could be detected. The results show, that MSCs cultured in a collagen type I hydrogel are able to undergo a distinct chondrogenic differentiation pathway, similar to that described for MSCs cultured in high‐density pellet cultures. These findings are valuable in terms of ex vivo predifferentiation or in situ differentiation of MSCs in collagen hydrogels for articular cartilage repair. © 2007 Wiley Periodicals, Inc. J Biomed Mater Res 2007