During mouse embryonic development, vasculogenesis initially occurs in the yolk sac, preceding neurulation. Our previous studies have demonstrated that maternal diabetes induces embryonic vasculopathy at early embryonic developmental stage by suppressing the expression of vascular growth factors including BMP4 (bone morphogenetic protein 4). This study aimed to determine whether restoring diabetes-inhibited BMP4 expression in Flk-1+ progenitors effectively prevented maternal diabetes-induced embryonic vasculopathy and NTDs. Transgenic (Tg) BMP4 expression in the vascular endothelial growth factor receptor 2 (Flk-1)-positive (Flk-1+) progenitors was achieved by crossing a Floxed BMP4 Tg mouse line with the Flk-1-Cre mouse line. Non-BMP4 Tg and BMP4 Tg embryos were harvested at E8.5 to assess the expression of BMP4, markers of endoplasmic reticulum stress, and expression of the Id genes, direct targets of BMP4; and the presence of cleaved caspase 3 and 8, apoptosis, and Smad signaling. BMP4 Tg overexpression neutralized its down-regulation by maternal diabetes in E8.5 embryos. Maternal diabetes-induced Flk-1+ progenitor apoptosis, impairment of blood island formation, and reduction of Flk-1+ progenitor number and blood vessel density, which were reversed by BMP4 Tg expression. BMP4 Tg expression in Flk-1+ progenitors blocked maternal diabetes-induced vasculopathy in early stage embryos (E7.5-E8.5) and consequently led to amelioration of maternal diabetes-induced neural tube defects (NTDs) at E10.5. BMP4 Tg expression inhibited maternal diabetes-induced endoplasmic reticulum stress and caspase cascade activation in the developing neuroepithelium, and reduced neuroepithelial cell apoptosis. BMP4 Tg expression re-activated Smad1/5/8 phosphorylation and reversed maternal diabetes-suppressed Smad4 expression. BMP4 Tg expression restored Id1 and Smad6 expression inhibited by maternal diabetes. In vitro, recombinant BMP4 protein blocked high glucose-induced Flk-1+ progenitor apoptosis and NTDs. These data demonstrate that BMP4 down-regulation in Flk-1+ progenitors are responsible for diabetes-induced yolk sac vasculopathy, and that restoring BMP4 expression prevents vasculopathy and rescues neuroepithelial cells from cellular organelle stress, leading to NTD reduction.