Cell-based approaches using mesenchymal stromal progenitor cells (MSCs) for the regeneration of intervertebral discs are attracting increased interest, even though the intervertebral disc is a very demanding environment. Implanted cells eventually face acidic pH, hypoxia, and a lack of nutrients. While the regenerative potential of MSCs for skeletal tissues has been well described, it is still questionable whether human MSCs can be prepared for prolonged survival and proper functioning and whether they can differentiate under the adverse conditions encountered in the disc. Here we examined the influence of hypoxia during expansion and differentiation on the chondrogenesis of MSCs. Chondrogenic differentiation was performed in in situ solidifying gelatin hydrogels, which represent a suitable matrix for delivering and anchoring cells within the disc tissue. To consider limitations in nutrition in the intervertebral disc, differentiation was performed at low cell concentrations in the gelatin hydrogels. Standard high density micromass cultures served as reference controls. To determine the quality of chondrogenesis we analyzed typical marker molecules such as collagen types I, II, X, Sox-9, MIA, and aggrecan mRNA using RT-qPCR and determined protein deposition by histological stainings and biochemical methods. We could demonstrate that in gelatin-based hydrogels chondrogenic differentiation of human MSCs is possible at low cell concentrations. The quality of chondrogenic differentiation could be improved by hypoxia. Best results were obtained when the entire in vitro process, including MSC expansion and subsequent differentiation, was done under hypoxic conditions. MSCs which were expanded under reduced oxygen tension were primed for a chondrogenic differentiation.