Mouse embryos mutant for the VEGF receptor, VEGFR2, Flk-1, or Kdr, fail to form both endothelial and hematopoietic cells, suggesting a possible role in a common progenitor to both lineages. The transcription factor Tal1 (Scl), is not expressed in Flk1(-/-) embryos, consistent with a downstream role in the Flk1 pathway. We tested whether expression of Tal1 under the Flk1 promoter was sufficient to rescue the loss of endothelial and hematopoietic cells in Flk1 mutants. Only partial rescue of hematopoiesis and endothelial development was observed in vivo. However, Flk1(-/Tal1) embryonic stem (ES) cells were capable of blast colony formation in vitro at levels equivalent to Flk1(+/-) heterozygotes. Ectopic expression of Tal1 under the Flk1 promoter in Flk1(+/-) mouse embryos or ES cells caused no obvious pathology but increased the number of blast colony forming cells (BL-CFCs) and enhanced their hematopoietic potential. These single-cell-derived BL-CFCs also produced smooth muscle cells in vitro. Increased Tal1 expression inhibited smooth muscle differentiation in this assay, whereas loss of Tal1 promoted smooth muscle formation. We propose a model in which the combinatorial effects of Flk1 and Tal1 act to regulate cell fate choice in early development into hematopoietic, endothelial, and smooth muscle lineages.