The research is one of two projects at the University of Edinburgh, which has received funding of 3.6 million from Scottish Enterprise, the Medical Research Council and the UK Stem Cell Foundation.
The scientists will investigate how liver cells (hepatocytes) derived from embryonic stem cells can be used in therapies for liver disease, currently the fifth most common cause of death in the UK. The team will study how the stem cells develop into liver cells, and how these can be used to repair damaged livers.
Professor John Iredale, of the MRC Centre for Regenerative Medicine at the University of Edinburgh, said: "In the first instance, the successful development of liver cells from embryonic stem cells will revolutionise and improve the way we are able to test drugs and novel therapies both for the liver and other organs, and ultimately may lead to a stem-cell-based approach to regenerate the liver.
"This would have a significant impact on reducing the need for donated organs and provide less invasive and traumatic treatment for those patients for whom transplantation is currently the only option."
The second project, which also involves embryonic stem cells, will look at new ways to repair damaged bone and cartilage. The centre's Dr Brendon Noble added: "Cartilage damage from injury, or diseases such as osteoarthritis, is a major problem in the UK.
"If we can prevent cartilage from breaking down or repair it, we could potentially reduce the need for hip replacements.
"Equally, there are patients who have been involved in traumatic accidents where their bones have been shattered. If we can find a way of healing the bone using stem cells then we can dramatically improve the quality of life for these patients."
The projects are being carried out in conjunction with Geron, a biopharmaceutical company.