Reciprocal interactions between vascular endothelial cells and vascular mesenchymal cells are essential for angiogenesis. Here we show that the basic helix-loop-helix transcription factor, dHAND/Hand2, is expressed in the developing vascular mesenchyme and its derivative, vascular smooth muscle cells (VSMCs). Targeted deletion of the dHAND gene in mice revealed severe defects of embryonic and yolk sac vascular development by embryonic day 9.5. Vascular endothelial cells expressed most markers of differentiation. Vascular mesenchymal cells migrated appropriately but failed to make contact with vascular endothelial cells and did not differentiate into VSMCs. In a screen for genes whose expression was dependent upon dHAND (using subtractive hybridization comparing wild-type and dHAND-null hearts), the VEGF₁₆₅ receptor, neuropilin-1, was found to be downregulated in dHAND mutants. These results suggest that dHAND is required for vascular development and regulates angiogenesis, possibly through a VEGF signaling pathway.