During embryogenesis, endothelial and blood precursors are hypothesized to arise from a common progenitor, the hemangioblast. Several genes that affect the differentiation of, or are expressed early in, both the endothelial and blood lineages may in fact function at the level of the hemangioblast. For example, the zebrafish cloche mutation disrupts the differentiation of both endothelial and blood cells. The transcription factor gene scl is expressed in both endothelial and blood lineages from an early stage and can regulate their differentiation. Here we report that in zebrafish the homeobox gene hhex (previously called hex) is also expressed in endothelial and blood lineages from an early stage. We find that hhex expression in these lineages is significantly reduced in cloche mutant embryos, indicating that hhex functions downstream of cloche to regulate endothelial and blood differentiation. Ectopic expression of hhex through injection of a DNA construct leads to the premature and ectopic expression of early endothelial and blood differentiation genes such as fli1, flk1 and gata1, indicating that Hhex can positively regulate endothelial and blood differentiation. However, analysis of a hhex deficiency allele shows that hhex is not essential for early endothelial and blood differentiation, suggesting that another gene, perhaps scl, compensates for the absence of Hhex function. Furthermore, we find that hhex and scl can induce each other's expression, suggesting that these two genes cross-regulate each other during early endothelial and blood differentiation. Together, these data provide the initial framework of a pathway that can be used to further integrate the molecular events regulating hemangioblast differentiation.