Hematopoiesis develops initially as discrete blood islands in the extraembryonic yolk sac of the embryo. These blood islands consist of clusters of primitive erythrocytes surrounded by developing angioblasts that ultimately form the yolk sac vasculature. The close developmental association of these early hematopoietic and endothelial cells has led to the hypothesis that they develop from a common precursor, a cell known as the hemangioblast. Using a developmental model system based on the in vitro differentiation capacity of embyronic stem (ES) cells, we have identified a precursor with the capacity to generate endothelial as well as primitive and definitive hematopoietic progeny. The developmental potential of this precursor population suggests that it represents the in vitro equivalent of the hemangioblast.