The first vasculature of the developing vertebrate embryo forms by assembly of endothelial cells into simple tubes from clusters of mesodermal angioblasts. Maturation of this vasculature involves remodeling, pruning and investment with mural cells. Hedgehog proteins are part of the instructive endodermal signal that triggers the assembly of the first primitive vessels in the mesoderm. We used a combination of genetic and in vitro culture methods to investigate the role of hedgehogs and their targets in murine extraembryonic vasculogenesis. We show that Bmps, in particular Bmp4, are crucial for vascular tube formation, that Bmp4 expression in extraembryonic tissues requires the forkhead transcription factor Foxf1 and that the role of hedgehog proteins in this process is to activate Foxf1 expression in the mesoderm. We show in the allantois that genetic disruption of hedgehog signaling (Smo(-/-)) has no effect on Foxf1 expression, and neither Bmp4 expression nor vasculogenesis are disturbed. By contrast, targeted inactivation of Foxf1 leads to loss of allantoic Bmp4 and vasculature. In vitro, the avascular Foxf1(-/-) phenotype can be rescued by exogenous Bmp4, and vasculogenesis in wild-type tissue can be blocked by the Bmp antagonist noggin. Hedgehogs are required for activation of Foxf1, Bmp4 expression and vasculogenesis in the yolk sac. However, vasculogenesis in Smo(-/-) yolk sacs can be rescued by exogenous Bmp4, consistent with the notion that the role of hedgehog signaling in primary vascular tube formation is as an activator of Bmp4, via Foxf1.