Fibrocytes are a distinct population of fibroblast-like progenitor cells in peripheral blood that have recently been shown to possess plasticity to differentiate along mesenchymal lineages, including commitment to myofibroblast and adipocyte cells. Here, we demonstrated that transforming growth factor (TGF) 1 drives fibrocyte-to-myofibroblast differentiation through activating Smad2/3 and SAPK/JNK MAPK pathways, which in turn stimulates ␣-smooth muscle actin expression. We determined that SAPK/JNK signaling acts in a positive feedback loop to modulate Smad2/3 nuclear availability and Smad2/3-dependent transcription. Conversely, fibrocyte-to-adipocyte differentiation is driven by the peroxisome proliferator-activated receptor (PPAR) ␥ agonist troglitazone, which is associated with cytoplasmic lipid accumulation and induction of aP2. Treatment with troglitazone also disrupted TGF1-activated SAPK/JNK signaling, leading to decreased Smad2/3 transactivation activity and ␣-smooth muscle actin expression. Interestingly, TGF1 was demonstrated to have reciprocal inhibition on fibrocyte differentiation to adipocytes. By activating SAPK/JNK signaling, which is normally suppressed during adipogenesis, PPAR␥-dependent transactivation activity and induction of aP2 expression were disrupted. Taken together, within the context of the local microenvironmental niche, the delicate balance of PPAR␥ and TGF1 activation drives the selection of an adipocyte or myofibroblast differentiation pathway through SAPK/ JNK signaling.