Herein, we investigated the role of VEGF signaling in the earliest events in vasculogenesis and found that it exerts critical effects shortly after mesodermal cells form by gastrulation. We showed that VEGF treatment of embryos caused an increase in the population of newly gastrulated mesodermal (NGM) cells that express the transcription factor TAL1. This increase in TAL1-positive cells was attributed to VEGF induction of VEGF receptor-2 (Flk1)-positive NGM cells that would normally not have been induced due to the limited availability of VEGF in the NGM. Evidence that VEGF-mediated induction of NGM cells is relevant to the endothelial lineage is the finding that induced TAL1-positive cells in the NGM formed ectopic structures whose cells exhibited characteristics of endothelial cells, including the ability to integrate into the vascular network and express the QH1 antigen. Finally, we showed that VEGF-induced TAL1 expression in the NGM which resulted in the formation of ectopic structures was mediated by Flk1 but not Flt1 signaling. In summary, we have established that VEGF signaling is critical to allocation of NGM to the endothelial lineage.