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Identification of articular cartilage progenitor cells (ACPCs) has opened up new opportunities for cartilage repair. These cells may be used as alternatives for or in combination with mesenchymal stromal cells (MSCs) in cartilage engineering. However, their potential needs to be further investigated, since only a few studies have compared ACPCs and MSCs when cultured in hydrogels. Therefore, in this study, we compared chondrogenic differentiation of equine ACPCs and MSCs in agarose constructs as monocultures and as zonally layered co-cultures under both normoxic and hypoxic conditions. ACPCs and MSCs exhibited distinctly differential production of the cartilaginous extracellular matrix (ECM). For ACPC constructs, markedly higher glycosaminoglycan (GAG) contents were determined by histological and quantitative biochemical evaluation, both in normoxia and hypoxia. Differential GAG production was also reflected in layered co-culture constructs. For both cell types, similar staining for type II collagen was detected. However, distinctly weaker staining for undesired type I collagen was observed in the ACPC constructs. For ACPCs, only very low alkaline phosphatase (ALP) activity, a marker of terminal differentiation, was determined, in stark contrast to what was found for MSCs. This study underscores the potential of ACPCs as a promising cell source for cartilage engineering.