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During fetal lung development, cells within the mesenchyme differentiate into vascular endothelia. This process of vasculogenesis gives rise to the cells that will eventually form the alveolar capillary bed. The cellular mechanisms regulating lung vasculogenesis are poorly understood, partly due to the lack of experimental systems that model this process. Here, we have developed and characterized a novel fetal mouse lung cell model of mesenchymal to endothelial differentiation. Using mesenchymal cells from the lungs of embryonal day 15 Immortomice, we show that endothelial growth media containing fibroblast growth factor-2 and vascular endothelial growth factor can stimulate formation of vascular endothelial cells in culture. These newly formed endothelial cells retain plasticity, as removing endothelial growth media causes loss of vascular markers and renewed formation of α-smooth muscle actin positive stress fibers. Cells with the highest Flk-1 expression differentiated into endothelia more efficiently. Individual mesenchymal cell clones had varied ability to acquire an endothelial phenotype. These fetal lung mesenchymal cells were multipotent, capable of differentiating into not only vascular endothelia, but also osteogenic and chondrongenic cell lineages. Our data establish a cell culture model for mesenchymal to endothelial differentiation that could prove useful for future mechanistic studies in the process of vasculogenesis both during normal development and in the pathogenesis of pulmonary vascular disease.