Here we have investigated the mechanisms that control astrocyte differentiation within the developing rat optic nerve. Astrocytes are normally generated by astrocyte precursor cells within the embryonic optic nerve. We show that there is a close temporal and spatial correlation between endothelial and astrocyte differentiation. We tested the potential role of endothelial cells in inducing astrocyte differentiation by developing an immunopanning method to highly purify endothelial cells from developing optic nerves. We show that the purified endothelial cells, but not other embryonic optic nerve cell types, strongly induce the differentiation of purified astrocyte precursor cells into astrocytes in vitro. Leukemia inhibitory factor (LIF) and LIF receptors have been implicated previously in astrocyte differentiation in vivo. We show that purified endothelial cells express LIF mRNA and that their ability to induce astrocyte differentiation is prevented by a neutralizing anti-LIF, but not anti-ciliary neurotrophic factor, antiserum. These findings demonstrate a role for endothelial cells in inducing astrocyte differentiation. The induction of astrocyte differentiation by endothelial cells makes sense phylogenetically, anatomically, and functionally, because astrocytes evolved concurrently with brain vasculature and ensheathe capillaries throughout the brain. The ability to purify and culture astrocytes and endothelial cells should provide an excellent model system for future studies of blood–brain barrier development.