Developing human muscle contains inter-myofibre progenitors expressing Bmp-receptor 1a (Bmpr1a) and Myf5 that respond to stimulation with Bmp4. Here we ablate Bmpr1a in Myf5- and MyoD-expressing cells in vivo. Mutant mice reveal increased intramuscular fat and reduced myofibre size in selected muscles, or following muscle injury. Myo-endothelial progenitors are the most affected cell type: clonal studies demonstrate that ablation of Bmpr1a in myo-endothelial cells results in decreased myogenic activity, while adipogenic differentiation is significantly increased. Downstream phospho-Smad 1, 5, 8 signalling is also severely decreased in mutant myo-endothelial cells. Lineage tracing of endothelial cells using VE-cadherin(Cre) driver failed to reveal a significant contribution of these cells to developing or injured skeletal muscle. Thus, myo-endothelial progenitors with functioning Bmpr1a signalling demonstrate myogenic potential, but their main function in vivo is to inhibit intramuscular adipogenesis, both through a cell-autonomous and a cell-cell interaction mechanism.