During mouse embryogenesis the first hematopoietic and endothelial cells form in blood islands located between layers of visceral endoderm and mesoderm in the yolk sac. The role of visceral endoderm in primitive hematopoiesis and vasculogenesis is not well understood. We have assessed the consequences of a lack of visceral endoderm on blood cell and vessel formation using embryoid bodies derived from mouse embryonic stem (ES) cells deficient in GATA-4, a transcription factor expressed in yolk sac endoderm. When differentiated in vitro, these mutant embryoid bodies do not develop an external visceral endoderm layer. We found that Gata4-/- embryoid bodies, grown either in suspension culture or attached to a substratum, are defective in primitive hematopoiesis and vasculogenesis as evidenced by a lack of recognizable blood islands and vascular channels and a reduction in the expression of the primitive erythrocyte marker epsilon y-globin. Expression of the endothelial cell transcripts FIk-1, FIt-1, and platelet-endothelial cell adhesion molecule (PECAM) was not affected in the mutant embryoid bodies. Gata4-/- ES cells retained the capacity to differentiate into primitive erythroblasts and endothelial cells when cultured in methylcellulose or matrigel. Analysis of chimeric mice, generated by injecting Gata4-/- ES cells into 8-cell stage embryos of ROSA26 transgenic animals, showed that Gata4-/- ES cells can form blood islands and vessels when juxtaposed to visceral endoderm in vivo. We conclude that the visceral endoderm is not essential for the differentiation of primitive erythrocytes or endothelial cells, but this cell layer plays an important role in the formation and organization of yolk sac blood islands and vessels.