Embryonic stem (ES) cells differentiate into neuroectodermal progenitors when cultured as floating aggregates in serum-free conditions. Here, we show that strict removal of exogenous patterning factors during early differentiation steps induces efficient generation of rostral hypothalamic-like progenitors (Rax(+)/Six3(+)/Vax1(+)) in mouse ES cell-derived neuroectodermal cells. The use of growth factor-free chemically defined medium is critical and even the presence of exogenous insulin, which is commonly used in cell culture, strongly inhibits the differentiation via the Akt-dependent pathway. The ES cell-derived Rax(+) progenitors generate Otp(+)/Brn2(+) neuronal precursors (characteristic of rostral-dorsal hypothalamic neurons) and subsequently magnocellular vasopressinergic neurons that efficiently release the hormone upon stimulation. Differentiation markers of rostral-ventral hypothalamic precursors and neurons are induced from ES cell-derived Rax(+) progenitors by treatment with Shh. Thus, in the absence of exogenous growth factors in medium, the ES cell-derived neuroectodermal cells spontaneously differentiate into rostral (particularly rostral-dorsal) hypothalamic-like progenitors, which generate characteristic hypothalamic neuroendocrine neurons in a stepwise fashion, as observed in vivo. These findings indicate that, instead of the addition of inductive signals, minimization of exogenous patterning signaling plays a key role in rostral hypothalamic specification of neural progenitors derived from pluripotent cells.