Mesenchymal stem cells (MSCs) due to their characteristic properties have a potential to treat osteoarthritis, one of the major growing joint problems. MSCs show differential ex vivo chondrogenic potential on the basis of source that remains to be validated under in vivo environment. This study compared chondrogenic potential of MSCs derived from two common sources, adipose tissue (AD) and bone marrow (BM) under ex vivo and in vivo environments. The randomized placebo controlled osteochondral defect (OCD) study divided n = 72 rabbits equally into Control, AD-MSCs and BM-MSCs groups. Ex vivo chondrogenic induction resulted in an increased aggrecan fold expression in BM-MSCs and AD-MSCs. The former cell type had significantly (p<0.05) higher fold expression as compared to the latter. The cell treated OCDs had significantly reduced gene expression for inflammatory markers (IL-6, IL-8 and TNF-α) as compared to the control. In OCD study, radiography, MRI, gross observation, histopathology and SEM revealed that the cell treated defects were early filled by the tissue that had better surface architecture and matrices as compared to the control. BM-MSCs treated defects had better scores especially for gross and histopathology than the AD-MSCs. Gene expression for osteochondral regulation and cartilaginous matrices was higher in BM-MSCs group while only for matrices including the Col I in AD-MSCs as compared to the control. It was concluded that OCD in the cell treated groups are filled early with mostly a fibrocartilaginous to hyaline tissue. BM-MSCs may have an edge over AD-MSCs in OCD repair.