The cellular microenvironment shapes stem cell identity and differentiation capacity. Mammalian early embryos are exposed to hypoxia in vivo and benefit from hypoxic culture in vitro. Yet, how different components of the hypoxia response impact stem cell transcriptional networks and lineage choices remains unclear. Here we investigated the effect of acute and prolonged hypoxia on stem cell states and differentiation efficiencies of embryonic and extraembryonic cells. We show that prolonged hypoxia enhances differentiation of embryonic stem (ES) cells towards the mesendoderm lineage by transcriptionally priming cells with a primitive streak signature including Wnt3 and T expression. Exposure to hypoxia in ES culture or during formation of gastrulation-mimicking organoids (gastruloids) moderates T expression and enhances structural complexity. Hypoxic gastruloids generated without exogenous Wnt induction can spontaneously elongate and self-organize. Direct gene regulation by Hif1a, combined with DNA demethylation and metabolic rewiring modulate the transcriptional response and phenotypic outcome. Our findings highlight the influence of the microenvironment on stem cell function and provide a rationale supportive of applying physiological conditions in synthetic embryo models.