The present invention provides methods and compositions for the production of hematopoietic progenitor cells or endothelial progenitor cells from human pluripotent stem cells using a defined cell culture medium without the need to utilize feeder cells or serum. In some embodiments, differentiation is accomplished using hypoxic atmospheric conditions. The defined medium of the present invention may contain growth factors and a matrix component. The hematopoietic progenitor cells may be further differentiated into cell lineages including red blood cells, macrophages, granulocytes, and megakaryocytes. The endothelial progenitor cells may be further differentiated into endothelial cells. Also disclosed are screening assays for identification of candidate substances that affect differentiation of pluripotent stem cells into progenitor cells.