Embryonic stem (ES) cells hold promise either as an in vitro model recapitulating early embryonic development or as a renewable source of therapeutically useful cells. Certain aspects of the microenvironment (or niche) play critical roles in determining the fate of ES cells. Here, we reported the feasibility of using the technique of microencapsulation to study the interaction between ES cells and their tissue niche. ES cells' growth, viability, and differentiation in vitro were evaluated when they were enclosed in solid or liquefied core APA microcapsules. In comparison with those microcapsules with solid cores, the liquefied capsules provided a more suitable culture environment for the growth of ES cells. In addition, behavior of encapsulated ES cells in vivo was observed after their being implanted into mouse peritoneal cavities. In contrast to the prolonged lag phase in vitro, ES cells encapsulated grew much faster in vivo. Typical markers for the undifferentiated ES cells, such as AP, SSEA-1, and Oct-4 gene, were also tracked by immunochemistry and RT-PCR. Results showed that expression of markers remained high over 2 weeks of culture in vitro. However, decreased expression of markers was found in those samples in vivo with time passage. These findings implied that it was the combination of the intrinsic characteristics of ES cells and their microenvironment that regulated their fate. The APA-ES cells system may provide an optimal model to study the interaction between stem cells and their tissue niches.