The efficient differentiation of retinal cells from human pluripotent stem cells remains a major challenge for the development of successful and cost-effective cellular therapies for various forms of blindness. Current differentiation strategies rely on exposing pluripotent stem cells to soluble growth factors that play key roles during early development (such as DKK-1, Noggin, and IGF-1) at 20% oxygen (O₂). This O₂ tension is, however, considerably higher than O₂ levels during organogenesis and may impair the differentiation process. In this study, we examined the effect of mimicking the physiological O₂ tension (2%) on the generation of retinal progenitor cells (RPCs) from human induced pluripotent stem cells (iPSCs) and human embryonic stem cells (hESCs). Both cell types were induced to differentiate into RPCs at 20% and 2% O₂. After 3 days in suspension culture as embryoid bodies (EBs), 2% O₂ caused the activation of hypoxia inducible factor responsive genes VEGF and LDHA and was accompanied by elevated expression levels of the early eye field genes Six3 and Lhx2. Twenty-one days after plating EBs in an adherent culture, we observed more RPCs co-expressing Pax6 and Chx10 at 2% O₂. Quantitative polymerase chain reaction analysis confirmed that lowering O₂ tension had caused a rise in the expression of both genes compared with 20% O₂. Our results indicate that mimicking physiological O₂ is a favorable condition for the efficient generation of RPCs from both hiPSCs and hESCs.