Xenopus in vitro studies have implicated both transforming growth factor beta (TGF-beta) and fibroblast growth factor (FGF) families in mesoderm induction. Although members of both families are present during mouse mesoderm formation, there is little evidence for their functional role in mesoderm induction. We show that mouse embryonic stem cells, which resemble primitive ectoderm, can differentiate to mesoderm in vitro in a chemically defined medium (CDM) in the absence of fetal bovine serum. In CDM, this differentiation is responsive to TGF-beta family members in a concentration-dependent manner, with activin A mediating the formation of dorsoanterior-like mesoderm and bone morphogenetic protein 4 mediating the formation of ventral mesoderm, including hematopoietic precursors. These effects are not observed in CDM alone or when TGF-beta 1, -beta 2, or -beta 3, acid FGF, or basic FGF is added individually to CDM. In vivo, at day 6.5 of mouse development, activin beta A RNA is detectable in the decidua and bone morphogenetic protein 4 RNA is detectable in the egg cylinder. Together, our data strongly implicate the TGF-beta family in mammalian mesoderm development and hematopoietic cell formation.