In a positron emission tomography (PET) study, the local uptake of the tracer is dependent on vascular delivery and retention. For dynamic studies the measured uptake time-course information can be best interpreted when knowledge of the time-course of tracer in the blood is available. This is certainly true for the most established tracers such as F-18-Fluorodeoxyglucose (FDG) and O-15-Water (H2O). Since direct sampling of blood as part of PET studies is increasingly impractical, there is ongoing interest in image-extraction of blood time-course information. But analysis of PET-measured blood pool signals is complicated because they will typically involve a combination of arterial, venous and tissue information. Thus, a careful appreciation of these components is needed to interpret the available data. To facilitate this process, we propose a novel Markov chain model for representation of the circulation of a tracer atom in the body. The model represents both arterial and venous time-course patterns. Under reasonable conditions equilibration of tracer activity in arterial and venous blood is achieved by the end of the PET study-consistent with empirical measurement. Statistical inference for Markov model parameters is a challenge. A penalized nonlinear least squares process, incorporating a generalized cross-validation score, is proposed. Random effects analysis is used to adaptively specify the structure of the penalty function based on historical samples of directly measured blood data. A collection of arterially sampled data from PET studies with FDG and H2O is used to illustrate the methodology. These data analyses are highly supportive of the overall modeling approach. An adaptation of the model to the problem of extraction of arterial blood signals from imaging data is also developed and promising preliminary results for cerebral and thoracic imaging studies with FDG and H2O are obtained.