Branching morphogenesis in the mammalian lung and Drosophila trachea relies on the precise localization of secreted modulators of epithelial growth to select branch sites and direct branch elongation, but the intercellular signals that control blood vessel branching have not been previously identified. We found that VEGF(120/120) mouse embryos, engineered to express solely an isoform of VEGF-A that lacks heparin-binding, and therefore extracellular matrix interaction domains, exhibited a specific decrease in capillary branch formation. This defect was not caused by isoform-specific differences in stimulating endothelial cell proliferation or by impaired isoform-specific signaling through the Nrp1 receptor. Rather, changes in the extracellular localization of VEGF-A in heparin-binding mutant embryos resulted in an altered distribution of endothelial cells within the growing vasculature. Instead of being recruited into additional branches, nascent endothelial cells were preferentially integrated within existing vessels to increase lumen caliber. The disruption of the normal VEGF-A concentration gradient also impaired the directed extension of endothelial cell filopodia, suggesting that heparin-binding VEGF-A isoforms normally provide spatially restricted stimulatory cues that polarize and thereby guide sprouting endothelial cells to initiate vascular branch formation. Consistent with this idea, we found opposing defects in embryos harboring only a heparin-binding isoform of VEGF-A, including excess endothelial filopodia and abnormally thin vessel branches in ectopic sites. We conclude that differential VEGF-A isoform localization in the extracellular space provides a control point for regulating vascular branching pattern.