The potential of mesenchymal stem cells (MSC) to differentiate into neural lineages has raised the possibility of autologous cell transplantation as a therapy for neurodegenerative diseases. We have identified a population of circulating human fetal mesenchymal stem cells (hfMSC) that are highly proliferative and can readily differentiate into mesodermal lineages such as bone, cartilage, fat and muscle. Here, we demonstrate for the first time that primary hfMSC can differentiate into cells with an oligodendrocyte phenotype both in vitro and in vivo. By exposing hfMSC to neuronal conditioned medium or by introducing the pro-oligodendrocyte gene, Olig-2, hfMSC adopted an oligodendrocyte-like morphology, expressed oligodendrocyte markers and appeared to mature appropriately in culture. Importantly we also demonstrate the differentiation of a clonal population of hfMSC into both mesodermal (bone) and ectodermal (oligodendrocyte) lineages. In the developing murine brain transplanted hfMSC integrated into the parenchyma but oligodendrocyte differentiation of these naïve hfMSC was very low. However, the proportion of cells expressing oligodendrocyte markers increased significantly (from 0.2% to 4%) by preexposing the cells to differentiation medium in vitro prior to transplantation. Importantly, the process of in vivo differentiation occurred without cell fusion. These findings suggest that hfMSC may provide a potential source of oligodendrocytes for study and potential therapy.