The receptor tyrosine kinase FLK1 and the transcription factor SCL play crucial roles in the establishment of hematopoietic and endothelial cell lineages in mice. We have previously used an in vitro differentiation model of embryonic stem (ES) cells and demonstrated that hematopoietic and endothelial cells develop via sequentially generated FLK1+ and SCL+ cells. To gain a better understanding of cellular and molecular events leading to hematopoietic specification, we examined factors necessary for FLK1+ and SCL+ cell induction in serum-free conditions. We demonstrate that bone morphogenetic protein (BMP) 4 was required for the generation of FLK1+ and SCL+ cells, and that vascular endothelial growth factor (VEGF) was necessary for the expansion and differentiation of SCL-expressing hematopoietic progenitors. Consistently, Flk1-deficient ES cells responded to BMP4 and generated TER119+ and CD31+ cells, but they failed to expand in response to VEGF. The Smad1/5 and map kinase pathways were activated by BMP4 and VEGF, respectively. The overexpression of SMAD6 in ES cells resulted in a reduction of FLK1+ cells. In addition, a MAP kinase kinase 1 specific inhibitor blocked the expansion of SCL+ cells in response to VEGF. Finally, VEGF mediated expansion of hematopoietic and endothelial cell progenitors was inhibited by TGFβ1, but was augmented by activin A. Our studies suggest that hematopoietic and endothelial commitment from the mesoderm occurs via BMP4-mediated signals and that expansion and/or differentiation of such progenitors is achieved by an interplay of VEGF, TGFβ1 and activin A signaling.