Friend virus induces erythroleukemia through a characteristic two-stage progression. The prevailing model proposes that during the initial, polyclonal stage of disease most of the infected cells terminally differentiate, resulting in acute erythrocytosis. In the late stage of disease, a clonal leukemia develops through the acquisition of new mutations—proviral insertional activation of Spi1/Pu.1 and mutation of p53. Previous work from our laboratory demonstrated that Friend virus activates the bone morphogenic protein 4 (BMP4)-dependent stress erythropoiesis pathway, which leads to the rapid expansion of stress erythroid progenitors, which are the targets for Friend virus in the spleen. We recently showed that stress erythroid progenitors have intrinsic self-renewal ability and therefore could function as leukemia stem cells (LSCs) when infected with Friend virus. Here, we show that the two stages of Friend virus-induced disease are caused by infection of distinct stress progenitor populations in the spleen. The development of leukemia relies on the ability of the virus to hijack the intrinsic self-renewal capability of stress erythroid progenitors leading to the generation of LSCs. Two signals are required for the self-renewal of Friend virus LSCs proviral insertional activation of Spi1/Pu.1 and Hedgehog-dependent signaling. Surprisingly, mutation of p53 is not observed in LSCs. These data establish a new model for Friend virus-induced erythroleukemia and demonstrate the utility of Friend virus as a model system to study LSC self-renewal. STEM CELLS 2012; 30:121–130.