The cardiovascular system develops early in embryogenesis from cells of mesodermal origin. To study the molecular and cellular processes underlying this transition, we have isolated mesodermal cells from murine embryos at E7.5 with characteristic properties of endothelial progenitors by using a combination of stromal cell layers and growth conditions. The isolated embryonic cells displayed unlimited stem-cell-like growth potential and a stable phenotype in culture. RNA analysis revealed that the embryonic cells express the endothelial-specific genes tie-2 and thrombomodulin (TM) as well as the early mesodermal marker fgf-3. The GSL I-B4 isolectin, a marker of early endothelial cells, specifically binds to the isolated cells. The in vitro differentiation with retinoic acid and cAMP led to a 5- to 10-fold induction of flk-1, von Willebrand Factor (vWF), TM, GATA-4 and GATA-6. Electron microscopy revealed that in vitro differentiation is associated with increased amounts of rER and Golgi, and a dramatic increase in secretory vesicles packed with vWF. When cultured in Matrigel, the embryonic cells assume the characteristic endothelial cobblestone morphology and form tubes. Injection into chicken embryos showed incorporation of the embryonic cells in the endocardium and the brain vasculature. The expression of TM, tie-2, GATA-4 and GATA-6 suggests that the isolated embryonic endothelial cell progenitors are derived from the proximal lateral mesoderm where the pre-endocardial tubes form. The properties of the endothelial cell progenitors described here provide a novel approach to analyze mediators, signaling pathways and transcriptional control in early vascular development.