The basic helix-loop-helix (bHLH) transcription factor HAND1 (also called eHAND) is expressed in numerous tissues during development including the heart, limbs, neural crest derivatives and extra-embryonic membranes. To investigate the role of Hand1 during development, we generated a Hand1 knockout mouse. Hand1-null mice survived to the nine somite stage at which time they succumbed to numerous developmental defects. One striking defect in Hand1-null embryos was the accumulation of hematopoietic cells between the yolk sac and the amnion because of defects in the yolk sac vasculature. In Hand1-null yolk sacs, vasculogenesis occurs but vascular refinement was arrested. Analysis of angiogenic genes in extra-embryonic membranes showed that most are expressed at normal levels in Hand1-null embryos but several, including Vegf, Ang1 and ephrin B2, and gene components of the Notch pathway are upregulated. In the absence of Hand1 the expression of the bHLH factor Hand2 is also enhanced. Although HAND1 and HAND2 share many structural features, and Hand2 is required for vasculature development in yolk sacs, enhanced expression of Hand2 is insufficient to compensate for the loss of Hand1. The most striking aspect of the vascular defect in Hand1 mutant yolk sacs is the abnormal distribution of smooth muscle cells. During normal angiogenesis, vascular smooth muscle precursors are recruited to the peri-endothelial tissue before differentiation, however, in Hand1 null yolk sacs, smooth muscle cells are not recruited but differentiate in clusters distributed throughout the mesoderm. These data indicate that Hand1 is required for angiogenesis and vascular smooth muscle recruitment in the yolk sac.