Derived from mesoderm precursors, hemangioblasts are bipotential common progenitors of hematopoietic cells and endothelial cells. The regulatory events controlling hematopoietic and endothelial lineage specification are largely unknown, especially in humans. In this study, we establish a serum-free and feeder-free system with a high-efficient embryoid body (EB) generation to investigate the signals that direct differentiation of human pluripotent stem cells (hPSCs), including human embryonic stem cells (hESCs) and induced pluripotent stem cells (hiPSCs). Consistent with previous studies, the CD34(+)CD31(+)VE-cadherin(+) (VEC(+)) cells derived from hPSCs contain hematopoietic and endothelial progenitors. In the presence of hematopoietic and endothelial growth factors, some of CD34(+)CD31(+)VEC(+) cells give rise to blast colony-forming cells (BL-CFCs), which have been used to characterize bipotential hemangioblasts. We found that the level of the transforming growth factor beta (TGF-β) 1 protein is increased during hPSC differentiation, and that TGF-β signaling has the double-edged effect on hematopoietic and endothelial lineage differentiation in hPSCs. An addition of TGF-β to hPSC differentiation before mesoderm induction promotes the development of mesoderm and the generation of CD34(+)CD31(+)VEC(+) cells. An addition of TGF-β inhibitor, SB431542, before mesoderm induction downregulates the expression of mesodermal markers and reduces the number of CD34(+)CD31(+)VEC(+) progenitor cells. However, inhibition of TGF-β signaling after mesoderm induction increases CD34(+)CD31(+)VEC(+) progenitors and BL-CFCs. These data provide evidence that a balance of positive and negative effects of TGF-β signaling at the appropriate timing is critical, and potential means to improve hematopoiesis and vasculogenesis from hPSCs.