The mechanisms involved in the induction of yolk sac mesoderm into blood islands and the role of visceral endoderm and mesoderm cells in regulating the restricted differentiation and proliferation of hematopoietic cells in the yolk sac remain largely unexplored. To better define the role of murine yolk sac microenvironment cells in supporting hematopoiesis, we established cell lines from day-9.5 gestation murine yolk sac visceral endoderm and mesoderm layers using a recombinant retrovirus vector containing Simian virus 40 large T- antigen cDNA. Obtained immortalized cell lines expressed morphologic and biosynthetic features characteristic of endoderm and mesoderm cells from freshly isolated yolk sacs. Similar to the differentiation of blood island hematopoietic cells in situ, differentiation of hematopoietic progenitor cells in vitro into neutrophils was restricted and macrophage production increased when bone marrow (BM) progenitor cells were cultured in direct contact with immortalized yolk sac cell lines as compared with culture on adult BM stromal cell lines. Yolk sac- derived cell lines also significantly stimulated the proliferation of hematopoietic progenitor cells compared with the adult BM stromal cell lines. Thus, yolk sac endoderm- and mesoderm-derived cells, expressing many features of normal yolk sac cells, alter the growth and differentiation of hematopoietic progenitor cells. These cells will prove useful in examining the cellular interactions between yolk sac endoderm and mesoderm involved in early hematopoietic stem cell proliferation and differentiation.