<p>Fetal hematopoiesis takes place in the liver before colonizing the bone marrow where it will persist for life. This colonization is thought to be mediated by specification of a microenvironment that selectively recruits hematopoietic cells to the nascent bone marrow. The identity and mechanisms regulating the specification of this colonization niche are unclear. Here we identify a VCAM1⁺ sinusoidal colonization niche in the diaphysis that regulates neutrophil and hematopoietic stem cell colonization of the bone marrow. Using confocal microscopy, we find that colonizing hematopoietic stem and progenitor cells (HSPC) and myeloid cells selectively localize to a subset of VCAM1⁺ sinusoids in the center of the diaphysis. <i>Vcam1</i> deletion in endothelial cells impairs hematopoietic colonization while depletion of yolk-sac-derived osteoclasts disrupts VCAM1⁺ expression, and impairs neutrophil and HSPC colonization to the bone marrow. Depletion of yolk-sac-derived myeloid cells increases fetal liver hematopoietic stem cell numbers, function and erythropoiesis independent of osteoclast activity. Thus, the yolk sac produces myeloid cells that have opposite roles in fetal hematopoiesis: while yolk-sac derived myeloid cells in the bone marrow promote hematopoietic colonization by specifying a VCAM1⁺ colonization niche, a different subset of yolk-sac-derived myeloid cells inhibits HSC in the fetal liver.</p>