The signals that direct pluripotent stem cell differentiation into lineage‐specific cells remain largely unknown. Here, we investigated the roles of BMP on vascular progenitor development from human embryonic stem cells (hESCs). In a serum‐free condition, hESCs sequentially differentiated into CD34+CD31−, CD34+CD31+, and then CD34−CD31+ cells during vascular cell development. CD34+CD31+ cells contained vascular progenitor population that gives rise to endothelial cells and smooth muscle cells. BMP4 promoted hESC differentiation into CD34+CD31+ cells at an early stage. In contrast, TGFβ suppressed BMP4‐induced CD34+CD31+ cell development, and promoted CD34+CD31− cells that failed to give rise to either endothelial or smooth muscle cells. The BMP‐Smad inhibitor, dorsomorphin, inhibited phosphorylation of Smad1/5/8, and blocked hESC differentiation to CD34+CD31+ progenitor cells, suggesting that BMP Smad‐dependent signaling is critical for CD34+CD31+ vascular progenitor development. Our findings provide new insight into how pluripotent hESCs differentiate into vascular cells. J. Cell. Biochem. 109: 363–374, 2010. © 2009 Wiley‐Liss, Inc.