Arginine-vasopressin (AVP) neurons exist in the hypothalamus, a major region of the diencephalon, and play an essential role in water balance. Here, we established the differentiation method for AVP-secreting neurons from human embryonic stem cells (hESCs) by recapitulating in vitro the in vivo embryonic developmental processes of AVP neurons. At first, the differentiation efficiency was improved. That was achieved through the optimization of the culture condition for obtaining dorsal hypothalamic progenitors. Secondly, the induced AVP neurons were identified by immunohistochemistry and these neurons secreted AVP after potassium chloride stimulation. Additionally, other hypothalamic neuropeptides were also detected, such as oxytocin, corticotropin-releasing hormone, thyrotropin-releasing hormone, pro-opiomelanocortin, agouti-related peptide, orexin, and melanin-concentrating hormone. This is the first report describing the generation of secretory AVP neurons derived from hESCs. This method will be applicable to research using disease models and, potentially, for regenerative medicine of the hypothalamus.