The epicardial epithelial-mesenchymal transition (EMT) is hypothesized to generate cardiovascular progenitor cells that differentiate into various cell types, including coronary smooth muscle and endothelial cells, perivascular and cardiac interstitial fibroblasts and cardiomyocytes. Here we show that an epicardial-specific knockout of the gene encoding Wilms' tumor-1 (Wt1) leads to a reduction in mesenchymal progenitor cells and their derivatives. We show that Wt1 is essential for repression of the epithelial phenotype in epicardial cells and during embryonic stem cell differentiation through direct transcriptional regulation of the genes encoding Snail (Snai1) and E-cadherin (Cdh1), two of the major mediators of EMT. Some mesodermal lineages do not form in Wt1-null embryoid bodies, but this effect is rescued by the expression of Snai1, underscoring the importance of EMT in generating these differentiated cells. These new insights into the molecular mechanisms regulating cardiovascular progenitor cells and EMT will shed light on the pathogenesis of heart diseases and may help the development of cell-based therapies.