Vascular endothelial growth factor A (Vegfa) has important roles in endochondral bone formation. Osteoblast precursors, endothelial cells and osteoclasts migrate from perichondrium into primary ossification centers of cartilage templates of future bones in response to Vegfa secreted by ( pre)hypertrophic chondrocytes. Perichondrial osteolineage cells also produce Vegfa, but its function is not well understood. By deleting Vegfa in osteolineage cells in vivo, we demonstrate that progenitor-derived Vegfa is required for blood vessel recruitment in perichondrium and the differentiation of osteoblast precursors in mice. Conditional deletion of Vegfa receptors indicates that Vegfa-dependent effects on osteoblast differentiation are mediated by Vegf receptor 2 (Vegfr2). In addition, Vegfa/Vegfr2 signaling stimulates the expression and activity of Indian hedgehog, increases the expression of β-catenin and inhibits Notch2. Our findings identify Vegfa as a regulator of perichondrial vascularity and osteoblast differentiation at early stages of bone development.