Reduced tissue oxygen tension (hypoxia) is appreciated as an efficient stimulus for neovascularization. The effect of hypoxia on the very first stages of vascular development is, however, less well characterized. Here we show that hypoxic conditions (1% O2) potently stimulated formation of an extensive vascular network during a discrete stage of mouse embryonal stem cell differentiation. The morphological changes correlated with an expanding pool of endothelial cells and with activation of the vascular endothelial growth factor-d (Vegf-d) and Vegf receptor-3 genes. VEGF receptor-3 expression was confined to vascular endothelial cells and analysis of the lymphatic marker Prox-1 revealed no expansion of lymphatic endothelial cells. Administration of neutralizing antibodies against either VEGF receptor-3 or VEGF receptor-2 impaired vascular network formation, whereas neutralizing antibodies against VEGF receptor-1 potentiated development of immature vascular structures. In addition, sequestering of VEGF receptor-3 ligands reduced vascularization in a manner similar to neutralization of VEGF receptor-3. We conclude that hypoxia-driven vascular development requires the activity of VEGF receptor-3.