Pluripotent mesenchymal stem cells in bone marrow differentiate into adipocytes, osteoblasts and other cells. Balanced cytodifferentiation of stem cells is essential for the formation and maintenance of bone marrow; however, the mechanisms that control this balance remain largely unknown. Whereas cytokines such as interleukin-1 (IL-1) and tumour-necrosis factor-alpha (TNF-alpha) inhibit adipogenesis, the ligand-induced transcription factor peroxisome proliferator-activated receptor-gamma (PPAR-gamma), is a key inducer of adipogenesis. Therefore, regulatory coupling between cytokine- and PPAR-gamma-mediated signals might occur during adipogenesis. Here we show that the ligand-induced transactivation function of PPAR-gamma is suppressed by IL-1 and TNF-alpha, and that this suppression is mediated through NF-kappaB activated by the TAK1/TAB1/NF-kappaB-inducing kinase (NIK) cascade, a downstream cascade associated with IL-1 and TNF-alpha signalling. Unlike suppression of the PPAR-gamma transactivation function by mitogen-activated protein kinase-induced growth factor signalling through phosphorylation of the A/B domain, NF-kappaB blocks PPAR-gamma binding to DNA by forming a complex with PPAR-gamma and its AF-1-specific co-activator PGC-2. Our results suggest that expression of IL-1 and TNF-alpha in bone marrow may alter the fate of pluripotent mesenchymal stem cells, directing cellular differentiation towards osteoblasts rather than adipocytes by suppressing PPAR-gamma function through NF-kappaB activated by the TAK1/TAB1/NIK cascade.