Defective differentiation of invasive, placental trophoblast cells has been associated with several pregnancy-related disorders. This study examines the molecular, functional, and morphological differentiation of lineage-specific, trophoblast giant cells under a gradient of oxygen concentrations. Low oxygen (3%) inhibited differentiation, but this inhibition was relieved in a stepwise fashion with increasing levels of oxygen. The oxygen-sensitive hypoxia-inducible factor 1alpha (HIF1A) is a major transcriptional regulator of the cellular response to low oxygen, and increased HIF1A protein levels and activity corresponded with the maintenance of the stem cell-like state and inhibition of trophoblast differentiation in low oxygen. Furthermore, constitutive expression of an oxygen-insensitive, active form of HIF1A protein mimicked the effects of low oxygen, inhibiting the differentiation of trophoblast giant cells. This study is the first to delineate the stepwise effects of oxygen on the activation of the trophoblast giant cell differentiation process and establishes a new paradigm from which to investigate trophoblast differentiation. In addition, this is the first reported study to demonstrate that constitutive HIF1A activity mediates oxygen's inhibition of differentiation. These results suggest that a dysregulation of HIF1A could contribute to impaired placental development.