The lymphatic system plays a key role in tissue fluid regulation and tumour metastasis, and lymphatic defects underlie many pathological states including lymphoedema, lymphangiectasia, lymphangioma and lymphatic dysplasia. However, the origins of the lymphatic system in the embryo, and the mechanisms that direct growth of the network of lymphatic vessels, remain unclear. Lymphatic vessels are thought to arise from endothelial precursor cells budding from the cardinal vein under the influence of the lymphatic hallmark gene Prox1 (prospero homeobox 1; ref. 4). Defects in the transcription factor gene SOX18 (SRY (sex determining region Y) box 18) cause lymphatic dysfunction in the human syndrome hypotrichosis-lymphoedema-telangiectasia, suggesting that Sox18 may also play a role in lymphatic development or function. Here we use molecular, cellular and genetic assays in mice to show that Sox18 acts as a molecular switch to induce differentiation of lymphatic endothelial cells. Sox18 is expressed in a subset of cardinal vein cells that later co-express Prox1 and migrate to form lymphatic vessels. Sox18 directly activates Prox1 transcription by binding to its proximal promoter. Overexpression of Sox18 in blood vascular endothelial cells induces them to express Prox1 and other lymphatic endothelial markers, while Sox18-null embryos show a complete blockade of lymphatic endothelial cell differentiation from the cardinal vein. Our findings demonstrate a critical role for Sox18 in developmental lymphangiogenesis, and suggest new avenues to investigate for therapeutic management of human lymphangiopathies.