Signaling by members of the transforming growth factor-β (TGF-β) superfamily, such as TGF-β3 and BMP7, and oxygen tension play a pivotal role in chondrocyte biology. The objective of this research was to investigate the endogenous BMP7 expression in human osteoarthritis (OA) cartilage and the effect of oxygen tension on the single or combined treatment with TGF-β3 and BMP7 on OA chondrocyte redifferentiation in three dimensional (3D) pellet cultures. The results showed the expression of BMP7 and its intracellular signaling target SMAD1/5/8 was decreased in early OA, while it was increased in later stages of OA. The combined treatment with TGF-β3 and BMP7, both in normoxia and hypoxia, was more effective than TGF-β3 or BMP7 alone in redifferentiating chondrocytes. This was reflected by Alcian blue/Safranin O staining and collagen type II protein expression, as well as by gene expression. Hypoxia elevated TGF-β3 and BMP7-induced matrix formation of OA chondrocytes and alleviated the catabolic gene expression. Interestingly, cells cultured under normoxia displayed mild signs of an inflammatory stress response, which was effectively counteracted by culturing the cells under low oxygen tension. Our data underscores the important modulatory role of oxygen tension on the chondrocyte's responsiveness to TGF-β3 and/or BMP7.