The rapid growth of the embryo places severe demands on the ability of the cardiovascular system to deliver oxygen to cells. To meet this need, erythroid progenitors rapidly expand in the fetal liver microenvironment such that by E14.5, erythropoiesis predominates in the fetal liver. In this report we show that the BMP4/Smad5 dependent stress erythropoiesis pathway plays a key role in the expansion of erythroid progenitors in the fetal liver. These data show that the fetal liver contains two populations of erythroid progenitors. One population resembles the steady state erythroid progenitors found in the adult bone marrow. While the second population exhibits the properties of stress erythroid progenitors found in adult spleen. Here we demonstrate that defects in BMP4/Smad5 signaling preferentially affect the expansion of the stress erythroid progenitors in the fetal liver leading to fetal anemia. These data suggest that steady state erythropoiesis is unable to generate sufficient erythrocytes to maintain the rapid growth of the embryo leading to the induction of the BMP4 dependent stress erythropoiesis pathway. These observations underscore the similarities between fetal erythropoiesis and stress erythropoiesis.