Mesenchymal stem cells (MSCs) are among the most promising cell sources for the treatment of various diseases. Nonetheless, the therapeutic efficacy in clinical trials has been inconsistent due to the heterogeneity of MSCs, which may be partially attributed to their undefined developmental origins. The lateral mesoderm is also a developmental source of MSCs that constitute appendicular skeletal elements in the developing vertebrate embryo. However, it is difficult to isolate homogeneous lateral mesoderm (LM)-derived MSCs from bone tissues or bone marrow due to the lack of understanding of their characteristics. Herein, we successfully established an efficient differentiation protocol for the derivation of MSCs with a LM origin from human pluripotent stem cells (hPSCs) under specific conditions. LM-MSCs resembled bone marrow-derived MSCs (BMSCs) with regard to cell surface markers, global gene profiles, and immunoregulatory activity and showed a homeodomain transcription factor (HOX) gene expression pattern typical of skeletal MSCs in long bones. Moreover, we demonstrated that LM-MSCs had an increased osteogenic/chondrogenic differentiation capacity and hematopoietic support potential compared to BMSCs. These homogeneous LM-MSCs may serve as a powerful tool for elucidating their precise role in bone formation and hematopoiesis and could be a potentially ideal cell source for therapeutic applications.