Embryonic stem (ES) cells differentiate into neuroectodermal progenitors when cultured as floating aggregates in serum-free conditions. Here, we show that strict removal of exogenous patterning factors during early differentiation steps induces efficient generation of rostral hypothalamic-like progenitors (Rax + /Six3 + /Vax1 + ) in mouse ES cell-derived neuroectodermal cells. The use of growth factor-free chemically defined medium is critical and even the presence of exogenous insulin, which is commonly used in cell culture, strongly inhibits the differentiation via the Akt-dependent pathway. The ES cell-derived Rax + progenitors generate Otp + /Brn2 + neuronal precursors (characteristic of rostral–dorsal hypothalamic neurons) and subsequently magnocellular vasopressinergic neurons that efficiently release the hormone upon stimulation. Differentiation markers of rostral–ventral hypothalamic precursors and neurons are induced from ES cell-derived Rax + progenitors by treatment with Shh. Thus, in the absence of exogenous growth factors in medium, the ES cell-derived neuroectodermal cells spontaneously differentiate into rostral (particularly rostral–dorsal) hypothalamic-like progenitors, which generate characteristic hypothalamic neuroendocrine neurons in a stepwise fashion, as observed in vivo . These findings indicate that, instead of the addition of inductive signals, minimization of exogenous patterning signaling plays a key role in rostral hypothalamic specification of neural progenitors derived from pluripotent cells.