Background: The developmental processes leading from the mesoderm to primitive and definitive haematopoietic and endothelial lineages, although of great importance, are still poorly defined. Recent studies have suggested a model in which common precursors give rise to endothelial progenitors and haematopoietic progenitors, the latter subsequently generating both primitive and definitive haematopoietic lineages. However, this model is contradicted by findings that suggest the emergence of haematopoietic cells from the endothelial lineage. Results: We found sequential steps in the differentiation of FLK1+ mesoderm into haematopoietic and endothelial lineages in an in vitro differentiation system of embryonic stem (ES) cells: (i) the GATA-1+ subset of FLK1+ mesodermal cells loses the capacity to give rise to endothelial cells and is restricted to primitive erythroid, macrophage and definitive erythroid progenitors; (ii) the remaining GATA-1- cells give rise to VE-cadherin+ endothelial cells; and subsequently (iii) multiple definitive haematopoietic progenitors and endothelial cells branch off from a subset of VE-cadherin+ cells. Conclusions: These observations strongly suggest that the divergence of primitive and multilineage definitive haematopoietic/endothelial lineages occurs first, and then multilineage definitive haematopoietic progenitors arise from VE-cadherin+ endothelial cells in the development of haematopoietic and endothelial cells.