It has been proposed that during embryonic development haematopoietic cells arise from a mesodermal progenitor with both endothelial and haematopoietic potential called the haemangioblast. A conflicting theory instead associates the first haematopoietic cells with a phenotypically differentiated endothelial cell that has haematopoietic potential (that is, a haemogenic endothelium). Support for the haemangioblast concept was initially provided by the identification during mouse embryonic stem cell differentiation of a clonal precursor, the blast colony-forming cell (BL-CFC), which gives rise to blast colonies with both endothelial and haematopoietic components. Although recent studies have now provided evidence for the presence of this bipotential precursor in vivo, the precise mechanism for generation of haematopoietic cells from the haemangioblast still remains completely unknown. Here we demonstrate that the haemangioblast generates haematopoietic cells through the formation of a haemogenic endothelium intermediate, providing the first direct link between these two precursor populations. The cell population containing the haemogenic endothelium is transiently generated during BL-CFC development. This cell population is also present in gastrulating mouse embryos and generates haematopoietic cells on further culture. At the molecular level, we demonstrate that the transcription factor Tal1 (also known as Scl; ref. 10) is indispensable for the establishment of this haemogenic endothelium population whereas the core binding factor Runx1 (also known as AML1; ref. 11) is critical for generation of definitive haematopoietic cells from haemogenic endothelium. Together our results merge the two a priori conflicting theories on the origin of haematopoietic development into a single linear developmental process.