In this work, we investigated the effects of lowered oxygen tension (20% and 5% O2) on the chondrogenesis and hypertrophy of articular chondrocytes (ACs), mesenchymal stem cells (MSCs) and their co-cultures with a 30:70 AC:MSC ratio. Cells were cultured for six weeks within porous scaffolds, and their cellularity, cartilaginous matrix production (collagen II/I expression ratio, hydroxyproline and GAG content) and hypertrophy markers (collagen X expression, ALP activity, calcium accumulation) were analyzed. After two weeks, hypoxic culture conditions had expedited chondrogenesis with all cell types by increasing collagen II/I expression ratio and matrix synthesis by ∼2.5–11 and ∼1.5–3.0 fold, respectively. At later times, hypoxia decreased cellularity but had little effect on matrix synthesis. ACs and co-cultures showed similarly high collagen II/I expression ratio and GAG rich matrix formation, whereas MSCs produced the least hyaline cartilage-like matrix and obtained a hypertrophic phenotype with eventual calcification. MSC hypertrophy was further emphasized in hypoxic conditions. We conclude that the most promising cell source for cartilage engineering was co-cultures, as they have a potential to decrease the need for primary chondrocyte harvest and expansion while obtaining a stable highly chondrogenic phenotype independent of the oxygen tension in the cultures.