Yolk sac (YS) hematopoiesis is critical for the survival of the embryo and a major source of tissue-resident macrophages that persist into adulthood. Yet, the transcriptional and epigenetic regulation of YS hematopoiesis remains poorly characterized. Here we report that the epigenetic regulator Ezh2 is essential for YS hematopoiesis but dispensable for subsequent aorta-gonad-mesonephros (AGM) blood development. Loss of EZH2 activity in hemogenic endothelium (HE) leads to the generation of phenotypically intact but functionally deficient erythro-myeloid progenitors (EMPs), while the generation of primitive erythroid cells is not affected. EZH2 activity is critical for the generation of functional EMPs at the onset of the endothelial-to-hematopoietic transition but subsequently dispensable. We identify a lack of Wnt signaling downregulation as the primary reason for the production of non-functional EMPs. Together, our findings demonstrate a critical and stage-specific role of Ezh2 in modulating Wnt signaling during the generation of EMPs from YS HE.