Normal human retinal vascular development uses angiogenesis and vasculogenesis, both of which are interrupted in the vaso‐obliteration phase of retinopathy of prematurity (ROP). Canine oxygen‐induced retinopathy (OIR) closely resembles human ROP. Canine retinal endothelial cells (ECs) and angioblasts were used to model OIR and characterize the effects of hyperoxia on angiogenesis and vasculogenesis. Cell cycle analysis showed that hyperoxia reduced the number of G1 phase cells and showed increased arrest in S phase for both cell types. Migration of ECs was significantly inhibited in hyperoxia (P < 0.01). Hyperoxia disrupted the cytoskeleton of angioblasts but not ECs after 2 days. Differentiation of angioblasts into ECs (determined by acetylated low‐density lipoprotein uptake) was evaluated after basic fibroblast growth factor treatment. Differentiation of angioblasts into pericytes was determined by smooth muscle actin expression after treatment with platelet‐derived growth factor. Differentiation into ECs was significantly inhibited by hyperoxia (P < 0.0001). The percentage of CXCR4⁺ cells (a marker for retinal vascular precursors) increased in both treatment groups after hyperoxia. These data show novel mechanisms of hyperoxia‐induced disruption of vascular development. Developmental Dynamics 236:981–990, 2007. © 2007 Wiley‐Liss, Inc.