<i>Objectives:</i> Giant cell tumor of bone is typified by massive infiltration of a bland neoplastic stroma by osteoclasts and monocyte progenitors. The current study aimed at evaluating the nature of the neoplastic cells and the mechanisms underlying the massive giant cell recruitment. <i>Methods:</i> Five different giant cell tumors were evaluated by immunohistochemistry, and explant cell cultures were established from the same tumors. Antigen expression profiles of both the tumors and the derived cultures were assessed. In order to determine if the mesenchymal cells are capable of differentiating into mature osteoblasts, retinoic acid was added to cell cultures and osteocalcin and alkaline phosphatase levels were measured. The proliferative effects of the mesenchymal cells on histiocyte-like cells were evaluated using the U-937 cell line. <i>Results:</i> A large stromal subpopulation expresses fibroblast growth factor receptor 3 (FGF-R3), indicating a mesenchymal origin of these cells. Few cells express bone- or cartilage-specific markers. Cell cultures are predominated by mesenchymal cells, as indicated by a strong staining by FGF R3. Retinoic acid induces osteoblastic differentiation, i.e. osteocalcin expression and alkaline phosphatase production. Conditioned medium of giant-cell-tumor-derived stromal cell cultures induces proliferation of U-937 cells, derived from histiocytic lymphoma. Papain digestion and dialysis of the conditioned media indicates the effector molecule to be a protein over 40 kD in size. The giant cell tumors as well as stromal cell cultures derived from giant cell tumors express osteoprotegerin ligand, the osteoclast activator. <i>Conclusions:</i> The neoplastic stromal spindle-shaped subpopulation of cells in giant cell tumors are mesenchymal stem cells capable of inducing histiocyte proliferation. Retinoid acid is capable of inducing differentiation of the cells into mature osteoblasts. This should be further investigated in an in vivo model to ascertain whether induction of differentiation will prevent bone loss and retard tumor progression.