The effect of the middle T oncogene of polyoma virus was studied in vivo using a replication-defective selectable retrovirus. Injection of virus into newborn and adult mice resulted in the rapid appearance of cavernous hemangiomas. Infection of embryos did not yield transgenic mice; therefore, embryonal stem (ES) cells were used as an alternative system. Several infected ES cell clones were established that constitutively expressed middle T and its associated tyrosine kinase activity. Chimeric embryos obtained by blastocyst injection of individual ES cell clones were specifically arrested at midgestation, when multiple hemangiomas disrupted blood vessel formation. From these tumors endothelial cell lines were established that retained expression of von Willebrand factor yet were tumorigenic in vivo. These results suggest that middle T acts in endothelial cells as a single-step oncogene and that ES cells provide a valuable system for the study of growth control during embryogenesis.