Gene expression profiling demonstrated that components of the cholinergic system, including choline acetyltransferase, acetylcholinesterase and nicotinic acetylcholine receptors (nAChRs), are expressed in embryonic stem cells and differentiating embryoid bodies (EBs). Triggering of nAChRs expressed in EBs by nicotine resulted in activation of MAPK and shifts of spontaneous differentiation toward hemangioblast. In vivo, non-neural nAChRs are detected early during development in fetal sites of hematopoiesis. Similarly, in vivo exposure of the developing embryo to nicotine resulted in higher numbers of hematopoietic progenitors in fetal liver. However postpartum, the number of hematopoietic stem/progenitor cells (HSPC) was decreased, suggesting an impaired colonization of the fetal bone marrow with HSPCs. This correlated with increased number of circulating HSPC and decreased expression of CXCR4 that mediates migration of circulating cells into the bone marrow regulatory niche. In addition, protein microarrays demonstrated that nicotine changed the profile of cytokines produced in the niche. While the levels of IL1alpha, IL1beta, IL2, IL9 and IL10 were not changed, the production of hematopoiesis-supportive cytokines including G-CSF, GM-CSF, IL3, IL6 and IGFBP-3 was decreased. This correlated with the decreased repopulating ability of HSPC in vivo and diminished hematopoietic activity in bone marrow cultures treated with nicotine. Interestingly, nicotine stimulated the production of IL4 and IL5, implying a possible role of the cholinergic system in pathogenesis of allergic diseases. Our data provide evidence that the nicotine-induced imbalance of the cholinergic system during gestation interferes with normal development and provides the basis for negative health outcomes postpartum in active and passive smokers.