Inhibiting angiogenesis has become an effective approach for treating cancer and other diseases. However, our understanding of signaling pathways in tumor angiogenesis has been limited by the embryonic lethality of many gene knockouts. To overcome this limitation, we used the plasticity of embryonic stem (ES) cells to develop a unique approach to study tumor angiogenesis. Murine ES cells can be readily manipulated genetically; in addition, ES cells implanted subcutaneously in mice develop into tumors that contain a variety of cell types (teratomas). We show that ES cells differentiate into bona fide endothelial cells within the teratoma, and that these ES-derived endothelial cells form part of the functional tumor vasculature. Using this powerful and flexible system, the Angiopoietin/Tie2 system is shown to have a key role in the regulation of tumor vessel size. Endothelial differentiation in the ES teratoma model allows gene-targeting methods to be used in the study of tumor angiogenesis.