SMAD proteins are downstream signal transducers of the transforming growth factor beta (TGF-beta) superfamily, which serve as pleiotropic regulators in embryonic and adult hematopoiesis. SMAD5, initially considered to mediate bone morphogenetic proteins (BMPs) signals, can also transduce the inhibitory signal of TGF-beta1 on proliferation of hematopoietic progenitors derived from human bone marrow. To define its specific role in regulation of primitive multipotential progenitors during early embryonic hematopoiesis, we examined Smad5(-/-) yolk sacs at E9.0 to 9.5 and detected an elevated number of high-proliferative potential colony-forming cells (HPP-CFCs) with enhanced replating potential. To exclude the possible influence of microenvironmental deficit on embryonic hematopoiesis in vivo, we performed in vitro embryonic stem (ES) cell differentiation assay and investigated the HPP-CFCs in particular. Smad5(-/-) embryoid bodies (EBs) contained an elevated number of blast colony-forming cells (BL-CFCs), the in vitro equivalent of hemangioblast, in contrast to reduced proliferation of primitive erythroid precursors (Ery/Ps) within the mutant EBs. More importantly, profoundly increased frequency of HPP-CFCs, featured with a gene-dosage effect, was detected within day 6 Smad5(-/-) EBs compared with the wild type. In addition, Smad5(-/-) HPP-CFCs displayed enhanced self-renewal capacity and decreased sensitivity to TGF-beta1 inhibition, suggesting a critical role of Smad5 in TGF-beta1 regulation of embryonic HPP-CFCs. Consistently, reverse transcription-polymerase chain reaction analysis detected alterations of the transcription factors including GATA-2 and AML1 as well as cytokine receptors in Smad5(-/-) HPP-CFC colonies. Together, these data define an important function of SMAD5 in negative regulation of high-proliferative potential precursors during embryonic hematopoiesis.