Bone morphogenetic protein (BMP) signaling regulates embryonic hematopoiesis via receptor-mediated activation of downstream SMAD proteins, including SMAD1. In previous work, we showed that Smad1 expression is sufficient to enhance commitment of mesoderm to hemangioblast fate. We also found indirect evidence to support a subsequent repressive function for Smad1 in hematopoiesis. To test this hypothesis directly, we developed a novel system allowing temporal control of Smad1 levels by conditional knockdown in embryonic stem cell derivatives. Depletion of Smad1 in embryoid body cultures before hemangioblast commitment limits hematopoietic potential because of a block in mesoderm development. Conversely, when Smad1 is depleted in FlK1(+) mesoderm, at a stage after hemangioblast commitment, the pool of hematopoietic progenitors is expanded. This involves enhanced expression levels for genes specific to hematopoiesis, including Gata1, Runx1 and Eklf, rather than factors required for earlier specification of the hemangioblast. The phenotype correlates with increased nuclear SMAD2 activity, indicating molecular cross-regulation between the BMP and TGF-β signaling pathways. Consistent with this mechanism, hematopoiesis was enhanced when Smad2 was directly expressed during this same developmental window. Therefore, this study reveals a temporally defined function for Smad1 in restricting the expansion of early hematopoietic progenitors.