The ability to direct differentiation of mouse embryonic stem (ES) cells into specific lineages not only provides new insights into the pathways that regulate lineage selection but also has translational applications, for example in drug discovery. We set out to develop a method of differentiating ES cells into mesodermal cells at high efficiency without first having to induce embryoid body formation. ES cells were plated on a feeder layer of PA6 cells, which have membrane-associated stromal-derived inducing activity (SDIA), the molecular basis of which is currently unknown. Stimulation of ES/PA6 co-cultures with Bone Morphogenetic Protein 4 (BMP4) both favoured self-renewal of ES cells and induced differentiation into a Desmin and Nestin double positive cell population. Combined stimulation with BMP4 and all-trans Retinoic Acid (RA) inhibited self-renewal and resulted in 90% of cells expressing Desmin and Nestin. Quantitative reverse transcription-polymerase chain reaction (qPCR) analysis confirmed that the cells were of mesodermal origin and expressed markers of mesenchymal and smooth muscle cells. BMP4 activation of a MAD-homolog (Smad)-dependent reporter in undifferentiated ES cells was attenuated by co-stimulation with RA and co-culture with PA6 cells. The Notch ligand Jag1 was expressed in PA6 cells and inhibition of Notch signalling blocked the differentiation inducing activity of PA6 cells. Our data suggest that mesodermal differentiation is regulated by the level of Smad activity as a result of inputs from BMP4, RA and the Notch pathway.