During embryonic development in amniotes, the extraembryonic mesoderm, where the earliest hematopoiesis and vasculogenesis take place, also generates smooth muscle cells (SMCs). It is not well understood how the differentiation of SMCs is linked to that of blood (BCs) and endothelial (ECs) cells. Here we show that, in the chick embryo, the SMC lineage is marked by the expression of a bHLH transcription factor, dHand. Notch activity in nascent ventral mesoderm cells promotes SMC progenitor formation and mediates the separation of SMC and BC/EC common progenitors marked by another bHLH factor, Scl. This is achieved by crosstalk with the BMP and Wnt pathways, which are involved in mesoderm ventralization and SMC lineage induction, respectively. Our findings reveal a novel role of the Notch pathway in early ventral mesoderm differentiation, and suggest a stepwise separation among its three main lineages, first between SMC progenitors and BC/EC common progenitors, and then between BCs and ECs.