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Pericytes have been suggested to play a role in regulation of vessel stability; one mechanism for this stabilization may be via pericyte-derived vascular endothelial growth factor (VEGF). To test the hypothesis that differentiation of mesenchymal cells to pericytes/smooth muscle cells (SMC) is accompanied by VEGF expression, we used endothelial cell (EC) and mesenchymal cell cocultures to model cell–cell interactions that occur during vessel development. Coculture of EC and 10T1/2 cells, multipotent mesenchymal cells, led to induction of VEGF expression by 10T1/2 cells. Increased VEGF expression was dependent on contact between EC-10T1/2 and was mediated by transforming growth factorβ (TGFβ). A majority of VEGF produced in coculture was cell- and/or matrix-associated. Treatment of cells with high salt, protamine, heparin, or suramin released significant VEGF, suggesting that heparan sulfate proteoglycan might be sequestering some of the VEGF. Inhibition of VEGF in cocultures led to a 75% increase in EC apoptosis, indicating that EC survival in cocultures is dependent on 10T1/2-derived VEGF. VEGF gene expression in developing retinal vasculature was observed in pericytes contacting newly formed microvessels. Our observations indicate that differentiated pericytes produce VEGF that may act in a juxtacrine/paracrine manner as a survival and/or stabilizing factor for EC in microvessels.