Abstract Vascular endothelial growth factor (VEGF) and the vascular endothelial growth factor receptors (VEGFRs) regulate the development of hemogenic mesoderm. Oxygen concentration-mediated activation of hypoxia-inducible factor targets such as VEGF may serve as the molecular link between the microenvironment and mesoderm-derived blood and endothelial cell specification. We used controlled-oxygen microenvironments to manipulate the generation of hemogenic mesoderm and its derivatives from embryonic stem cells. Our studies revealed a novel role for soluble VEGFR1 (sFlt-1) in modulating hemogenic mesoderm fate between hematopoietic and endothelial cells. Parallel measurements of VEGF and VEGFRs demonstrated that sFlt-1 regulates VEGFR2 (Flk-1) activation in both a developmental-stage-dependent and oxygen-dependent manner. Early transient Flk-1 signaling occurred in hypoxia because of low levels of sFlt-1 and high levels of VEGF, yielding VEGF-dependent generation of hemogenic mesoderm. Sustained (or delayed) Flk-1 activation preferentially yielded hemogenic mesoderm-derived endothelial cells. In contrast, delayed (sFlt-1-mediated) inhibition of Flk-1 signaling resulted in hemogenic mesoderm-derived blood progenitor cells. Ex vivo analyses of primary mouse embryo-derived cells and analysis of transgenic mice secreting a Flt-1-Fc fusion protein (Fc, the region of an antibody which is constant and binds to receptors) support a hypothesis whereby microenvironmentally regulated blood and endothelial tissue specification is enabled by the temporally variant control of the levels of Flk-1 activation. Disclosure of potential conflicts of interest is found at the end of this article.