Hematopoietic differentiation of embryonic stem cells (ESCs) in vitro has been used as a model to study early hematopoietic development, and it is well documented that hematopoietic differentiation can be enhanced by overexpression of HOXB4. HOXB4 is expressed in hematopoietic progenitor cells (HPCs) where it promotes self-renewal, but it is also expressed in the primitive streak of the gastrulating embryo. This led us to hypothesize that HOXB4 might modulate gene expression in prehematopoietic mesoderm and that this property might contribute to its prohematopoietic effect in differentiating ESCs. To test our hypothesis, we developed a conditionally activated HOXB4 expression system using the mutant estrogen receptor (ERT2) and showed that a pulse of HOXB4 prior to HPC emergence in differentiating ESCs led to an increase in hematopoietic differentiation. Expression profiling revealed an increase in the expression of genes associated with paraxial mesoderm that gives rise to the hematopoietic niche. Therefore, we considered that HOXB4 might modulate the formation of the hematopoietic niche as well as the production of hematopoietic cells per se. Cell mixing experiments supported this hypothesis demonstrating that HOXB4 activation can generate a paracrine as well as a cell autonomous effect on hematopoietic differentiation. We provide evidence to demonstrate that this activity is partly mediated by the secreted protein FRZB. STEM CELLS 2012; 30:150–160.