We report expression of Pax3, an important regulator of skeletal muscle stem cell behaviour, in the brachial and femoral arteries of adult mice. In these contractile arteries of the limb, but not in the elastic arteries of the trunk, bands of GFP-positive cells were observed in Pax3(GFP/+) mice. Histological and biochemical examination of the vessels, together with clonal analysis after purification of Pax3-GFP-positive cells by flow cytometry, established their vascular smooth muscle identity. These blood-vessel-derived cells do not respond to inducers of other mesodermal cell types, such as bone, however, they can contribute to muscle fibre formation when co-cultured with skeletal muscle cells. This myogenic conversion depends on the expression of Pax3, but is rare and non-cell autonomous as it requires cell fusion. Myocardin, which promotes acquisition of a mature smooth muscle phenotype in these Pax3-GFP-positive cells, antagonises their potential for skeletal muscle differentiation. Genetic manipulation shows that myocardin is, however, positively regulated by Pax3, unlike genes for other myocardin-related factors, MRTFA, MRTFB or SRF. Expression of Pax3 overlaps with that reported for Msx2, which is required for smooth muscle differentiation of blood vessel-derived multipotent mesoangioblasts. These observations are discussed with respect to the origin and function of Pax3-expressing cells in blood vessels, and more general questions of cell fate determination and adult cell plasticity and reprogramming.