In this report, we have defined the stage at which Scl functions in the establishment of the hematopoietic system and provide evidence that its primary role is in the generation of the hematopoietic lineages from a progenitor called the blast colony-forming cell (BL-CFC), a cell considered to be the in vitro equivalent of the hemangioblast. Using an embryonic stem (ES) cell line in which lacZ cDNA has been targeted to the Scl locus, we show that most of the BL-CFCs are detected in the SCL/lacZ- population, indicating that this progenitor does not express Scl. In the blast colony assay, Scl-/- cells initiate colony growth but are unable to generate endothelial and hematopoietic progeny and thus form colonies consisting of vascular smooth muscle cells only. The capacity to give rise to blast colonies can be rescued by retroviral transduction of a wild-type Scl gene into Scl-/- FLK-1+ cells, suggesting that the BL-CFC is generated in this population. Finally, we show that Scl-/- endothelial cells display a growth deficiency in monolayer cultures that can be partially overcome by maintaining this population as 3-dimensional aggregates indicating that specific cellular interactions are required for maintenance of the Scl-/- endothelial lineage in vitro.