Co-development of the cardiovascular and pulmonary systems is a recent evolutionary adaption to terrestrial life that couples cardiac output with the gas exchange function of the lung. Here we show that the murine pulmonary vasculature develops even in the absence of lung development. We have identified a population of multipotent cardiopulmonary mesoderm progenitors (CPPs) within the posterior pole of the heart that are marked by the expression of Wnt2, Gli1 and Isl1. We show that CPPs arise from cardiac progenitors before lung development. Lineage tracing and clonal analysis demonstrates that CPPs generate the mesoderm lineages within the cardiac inflow tract and lung including cardiomyocytes, pulmonary vascular and airway smooth muscle, proximal vascular endothelium, and pericyte-like cells. CPPs are regulated by hedgehog expression from the foregut endoderm, which is required for connection of the pulmonary vasculature to the heart. Together, these studies identify a novel population of multipotent cardiopulmonary progenitors that coordinates heart and lung co-development that is required for adaptation to terrestrial existence.