The primary function of the thyroid gland is to metabolize iodide by synthesizing thyroid hormones, which are critical regulators of growth, development and metabolism in almost all tissues. So far, research on thyroid morphogenesis has been missing an efficient stem-cell model system that allows for the in vitro recapitulation of the molecular and morphogenic events regulating thyroid follicular-cell differentiation and subsequent assembly into functional thyroid follicles. Here we report that a transient overexpression of the transcription factors NKX2-1 and PAX8 is sufficient to direct mouse embryonic stem-cell differentiation into thyroid follicular cells that organize into three-dimensional follicular structures when treated with thyrotropin. These in vitro-derived follicles showed appreciable iodide organification activity. Importantly, when grafted in vivo into athyroid mice, these follicles rescued thyroid hormone plasma levels and promoted subsequent symptomatic recovery. Thus, mouse embryonic stem cells can be induced to differentiate into thyroid follicular cells in vitro and generate functional thyroid tissue.