In liver development, a number of growth factors (GFs) and components of the extracellular matrix (ECMs) lead to differentiation of liver parenchymal cells. As the liver contains many cell types, specifically investigating their functional effects on hepatic stem cell populations is difficult. Prospective isolation and clonal assays for hepatic stem cells enable the examination of direct effects of GFs and ECMs on this rare cell fraction. Using previously purified cells that fulfill the criteria for hepatic stem cells, we examined how GFs and ECMs regulate differentiation in the developing liver. We show here that hepatocyte growth factor (HGF) induced early transition of albumin(ALB)-negative stem cells to ALB-positive hepatic precursors resembling hepatoblasts and then oncostatin M (OSM) promoted their differentiation to tryptophan-2, 3-dioxygenase (TO)-positive mature hepatocytes. During this transition, ECMs were necessary for the differentiation of stem cells and precursors, but their effects were only supportive. In the first step of stem cell differentiation induced by HGF, the expression of CCAAT/enhancer binding protein (C/EBP), a basic leucine zipper transcription factor, changed dramatically. When C/EBP function was inhibited in stem cells, they stopped differentiating to hepatocyte-lineage cells and proliferated actively. These are the first findings to illustrate the mechanism of hepatic stem cell differentiation in liver development.