Members of the transforming growth factor beta1 (TGF-beta) superfamily--namely, TGF-beta and BMP2--applied to undifferentiated murine embryonic stem cells up-regulated mRNA of mesodermal (Brachyury) and cardiac specific transcription factors (Nkx2.5, MEF2C). Embryoid bodies generated from stem cells primed with these growth factors demonstrated an increased potential for cardiac differentiation with a significant increase in beating areas and enhanced myofibrillogenesis. In an environment of postmitotic cardiomyocytes, stem cells engineered to express a fluorescent protein under the control of a cardiac promoter differentiated into fluorescent ventricular myocytes beating in synchrony with host cells, a process significantly enhanced by TGF-beta or BMP2. In vitro, disruption of the TGF-beta/BMP signaling pathways by latency-associated peptide and/or noggin prevented differentiation of stem cells. In fact, only host cells that secrete a TGF-beta family member induced a cardiac phenotype in stem cells. In vivo, transplantation of stem cells into heart also resulted in cardiac differentiation provided that TGF-beta/BMP2 signaling was intact. In infarcted myocardium, grafted stem cells differentiated into functional cardiomyocytes integrated with surrounding tissue, improving contractile performance. Thus, embryonic stem cells are directed to differentiate into cardiomyocytes by signaling mediated through TGF-beta/BMP2, a cardiac paracrine pathway required for therapeutic benefit of stem cell transplantation in diseased heart.