Angiogenesis, also known as new blood vessel formation, is regulated coordinately with other tissue differentiation events during limb development. Although vascular endothelial cell growth factor (VEGF) is important in the regulation of angiogenesis, chondrogenesis and osteogenesis during limb development, the role of other angiogenic factors is not well understood. Sphingosine 1-phosphate, a platelet-derived lipid mediator, regulates angiogenesis and vascular maturation via its action on the G-protein-coupled receptor S1P₁ (also known as EDG-1). In addition to vascular defects, abnormal limb development was also observed in S1p₁^−/− mice. Here we show that strong induction of S1P₁ expression is observed in the blood vessels and the interdigital mesenchymal cells during limb development. Deletion of S1P₁ results in aberrant chondrocyte condensation and defective digit morphogenesis. Interestingly, the vasculature in the S1p₁^−/− limbs was hyperplastic and morphologically altered. In addition, the hypoxia inducible factor (HIF)-1α and its response gene VEGF were induced in S1p₁^−/− limbs. However, aberrant regulation of HIF-1α and VEGF were not observed in embryonic fibroblasts derived from S1p₁^−/− mice, suggesting a non-cell autonomous effect of S1P₁ on VEGF expression. Indeed, similar limb defects were observed in endothelium-specific S1P₁ null mice in vivo. These data suggest that the function of S1P₁ in the developing vasculature is essential for proper limb development.