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Embryonic stem cells (ESC) have been established previously from the inner cell mass cells of mouse blastocysts. In suspension culture, they spontaneously differentiate to blood-island-containing cystic embryoid bodies (CEB). The development of blood vessels from in situ differentiating endothelial cells of blood islands, a process which we call vasculogenesis, was induced by injecting ESC into the peritoneal cavity of syngeneic mice. In the peritoneum, fusion of blood islands and formation of an in vivo-like primary capillary plexus occurred. Transplantation of ESC and ESC-derived complex and cystic embryoid bodies (ESC-CEB) onto the quail chorioallantoic membrane (CAM) induced an angiogenic response, which was directed by nonyolk sac endoderm structures. Neither yolk sac endoderm from ESC-CEB nor normal mouse yolk sac tissue induced angiogenesis on the quail CAM. Extracts from ESC-CEB stimulated the proliferation of capillary endothelial cells in vitro. Mitogenic activity increase during in vitro culture and differentiation of ESC. Almost all growth factor activity was associated with the cells. The ESC-CEB derived endothelial cell growth factor bound to heparin-sepharose. The identification of acidic fibroblast growth factor (FGF)in heparin-sepharose-purified material was accomplished by immunoblot experiments involving antibodies against acidic and basic FGF. We conclude that vasculogenesis, the development of blood vessels from in situ differentiating endothelial cells, and angiogenesis, the sprouting of capillaries from preexisting vessels are very early events during embryogenesis which can be studied using ESC differentiating in vitro. Our results suggest that vasculogenesis and angiogenesis are differently regulated.