Osteoblasts and adipocytes originate from common mesenchymal precursors. With aging, there is a decrease in osteoprogenitor cells that parallels an increase of adipocytes in bone marrow. We observed that rabbit serum (RS) induces adipocyte-like differentiation in human osteosarcoma SaOS-2/B10 and MG-63 cell lines, in rat ROS17/2.8 cells, and in mouse calvaria-derived osteoblastic MB1.8 cells, as evidenced by the accumulation of Oil Red O positive lipid vesicles and the decrease in alkaline phosphatase expression. Both SaOS-2/B10 and MG-63 cells, but not ROS17/2.8 nor MB1.8 cells, express significant levels of PPARγ mRNA, a member of the peroxisome proliferator activated receptor (PPAR) family that has been implicated in the control of adipocyte differentiation. However, both ROS17/2.8 and MG-63 cells express significant levels of the adipocyte selective marker, aP2 fatty acid binding mRNA, which can be further increased by RS. These cell types express PPARδ/NUC-1 but not PPARα, indicating that cells that do not express either PPARγ or PPARα are capable of differentiating into adipocyte-like cells. Transfection experiments in COS cells showed that compared with fetal bovine serum (FBS), RS is rich in agents that stimulate PPAR-dependent transcription. The stimulatory activity was ethyl acetate extractable and was 35-fold more abundant in RS than in FBS. Purification and analysis revealed that the major components of this extract are free fatty acids. Furthermore, the same fatty acids, a mixture of palmitic, oleic, and linoleic acids, activate the PPARs and induce adipocyte-like differentiation of both ROS17/2.8 and SaOS-2/B10 cells. These findings suggest that fatty acids or their metabolites can initiate the switch from osteoblasts to adipocyte-like cells.