We investigated the interaction between angiogenic and osteogenic factors in bone formation and bone healing with ex vivo gene therapy using muscle-derived stem cells genetically engineered to express human bone morphogenetic protein-4 (BMP4), VEGF, or VEGF-specific antagonist (soluble Flt1). Our results show that although VEGF alone did not improve bone regeneration, it acted synergistically with BMP4 to increase recruitment of mesenchymal stem cells, to enhance cell survival, and to augment cartilage formation in the early stages of endochondral bone formation. These early effects, coupled with accelerated cartilage resorption, eventually led to a significant enhancement of bone formation and bone healing. The beneficial effect of VEGF on bone healing elicited by BMP4 depends critically on the ratio of VEGF to BMP4, with an improper ratio leading to detrimental effects on bone healing. Finally, we show that soluble Flt1 inhibits bone formation elicited by BMP4. Thus, VEGF plays an important role in bone formation elicited by BMP4, and it can significantly enhance BMP4-elicited bone formation and regeneration through multiple mechanisms. This study has important implications for the formulation of new strategies to improve bone healing through increasing mesenchymal stem cell recruitment and survival, in combination with muscle-derived stem cell-based gene therapy.