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The placenta links feto‐maternal circulation for exchanges of nutrients, gases, and metabolic wastes between the fetus and mother, being essential for pregnancy process and maintenance. The allantois and mesodermal components of amnion, chorion, and yolk sac are derived from extraembryonic mesoderm (Ex‐Mes), however, the mechanisms contributing to distinct components of the placenta and regulation the interactions between allantois and epithelium during chorioallantoic fusion and labyrinth formation remains unclear. Isl1 is expressed in progenitors of the Ex‐Mes and allantois the Isl1 mut mouse line is analyzed to investigate contribution of Isl1+ Ex‐Mes / allantoic progenitors to cells of the allantois and placenta. This study shows that Isl1 identifies the Ex‐Mes progenitors for endothelial and vascular smooth muscle cells, and most of the mesenchymal cells of the placenta and umbilical cord. Deletion of Isl1 causes defects in allantois growth, chorioallantoic fusion, and placenta vessel morphogenesis. RNA‐seq and CUT&Tag analyses revealed that Isl1 promotes allantoic endothelial, inhibits mesenchymal cell differentiation, and allantoic signals regulated by Isl1 mediating the inductive interactions between the allantois and chorion critical for chorionic epithelium differentiation, villous formation, and labyrinth angiogenesis. This study above reveals that Isl1 plays roles in regulating multiple genetic and epigenetic pathways of vascular morphogenesis, provides the insight into the mechanisms for placental formation, highlighting the necessity of Isl1 for placenta formation/pregnant maintenance. [ABSTRACT FROM AUTHOR]