Patients with Down syndrome (trisomy 21, T21) have hematologic abnormalities throughout life. Newborns frequently exhibit abnormal blood counts and a clonal preleukemia. Human T21 fetal livers contain expanded erythro-megakaryocytic precursors with enhanced proliferative capacity. The impact of T21 on the earliest stages of embryonic hematopoiesis is unknown and nearly impossible to examine in human subjects. We modeled T21 yolk sac hematopoiesis using human induced pluripotent stem cells (iPSCs). Blood progenitor populations generated from T21 iPSCs were present at normal frequency and proliferated normally. However, their developmental potential was altered with enhanced erythropoiesis and reduced myelopoiesis, but normal megakaryocyte production. These abnormalities overlap with those of T21 fetal livers, but also reflect important differences. Our studies show that T21 confers distinct developmental stage- and species-specific hematopoietic defects. More generally, we illustrate how iPSCs can provide insight into early stages of normal and pathological human development.