We report that human embryonic stem cells contain a population of vascular progenitor cells that have the ability to differentiate into endothelial-like and smooth muscle (SM)-like cells. Vascular progenitor cells were isolated from EBs grown in suspension for 10 days and were characterized by expression of the endothelial/hematopoietic marker CD34 (CD34+ cells). When these cells are subsequently cultured in EGM-2 (endothelial growth medium) supplemented with vascular endothelial growth factor-165 (50 ng/mL), they give rise to endothelial-like cells characterized by a cobblestone cell morphology, expression of endothelial markers (platelet endothelial cell-adhesion molecule-1, CD34, KDR/Flk-1, vascular endothelial cadherin, von Willebrand factor), incorporation of acetylated low-density lipoprotein, and formation of capillary-like structures when placed in Matrigel. In contrast, when CD34+ cells are cultured in EGM-2 supplemented with platelet-derived growth factor-BB (50 ng/mL), they give rise to SM-like cells characterized by spindle-shape morphology, expression of SM cell markers (alpha-SM actin, SM myosin heavy chain, calponin, caldesmon, SM alpha-22), and the ability to contract and relax in response to common pharmacological agents such as carbachol and atropine but rarely form capillary-like structures when placed in Matrigel. Implantation studies in nude mice show that both cell types contribute to the formation of human microvasculature. Some microvessels contained mouse blood cells, which indicates functional integration with host vasculature. Therefore, the vascular progenitors isolated from human embryonic stem cells using methods established in the present study could provide a means to examine the mechanisms of endothelial and SM cell development, and they could also provide a potential source of cells for vascular tissue engineering.