Endothelial cells (ECs) represent the major component of the embryonic pancreatic niche and play a key role in the differentiation of insulin-producing β cells in vivo. However, it is unknown if ECs promote such differentiation in vitro. We investigated whether interaction of ECs with mouse embryoid bodies (EBs) in culture promotes differentiation of pancreatic progenitors and insulin-producing cells and the mechanisms involved. We developed a co-culture system of mouse EBs and human microvascular ECs (HMECs). An increase in the expression of the pancreatic markers PDX-1, Ngn3, Nkx6.1, proinsulin, GLUT-2, and Ptf1a was observed at the interface between EBs and ECs (EB-EC). No expression of these markers was found at the periphery of EBs cultured without ECs or those co-cultured with mouse embryonic fibroblasts (MEFs). At EB-EC interface, proinsulin and Nkx6.1 positive cells co-expressed phospho-Smad1/5/8 (pSmad1/5/8). Therefore, EBs were treated with HMEC conditioned media (HMEC-CM) suspecting soluble factors involved in bone morphogenetic protein (BMP) pathway activation. Upregulation of PDX-1, Ngn3, Nkx6.1, insulin-1, insulin-2, amylin, SUR1, GKS, and amylase as well as down-regulation of SST were detected in treated EBs. In addition, higher expression of BMP-2/-4 and their receptor (BMPR1A) were also found in these EBs. Recombinant human BMP-2 (rhBMP-2) mimicked the effects of the HMEC-CM on EBs. Noggin (NOG), a BMP antagonist, partially inhibited these effects. These results indicate that the differentiation of EBs to pancreatic progenitors and insulin-producing cells can be enhanced by ECs in vitro and that BMP pathway activation is central to this process.