Marrow stromal cells (MSCs) are capable of differentiating into various cell types including endothelial cells. Microenvironment is important in cell fate determination. Tumor necrosis factor-alpha converting enzyme (TACE), a well-characterized "sheddase," participates in the differentiation process of multiple lineages by the proteolytic release of membrane-bound proteins such as tumor necrosis factor-alpha (TNF-alpha). We investigated the endothelial differentiation of MSCs under two coculture conditions: 1) direct MSCs-rat brain microvascular endothelial cells (rBMECs) contact coculture; and 2) indirect coculture of MSCs and rBMECs. Also, we examined the role of TACE/TNF-alpha signaling in the process of differentiation under direct coculture condition. We found that endothelial differentiation of MSCs was substantially enhanced in MSCs-rBMECs direct contact coculture, but not in indirect transwell coculture condition. Transcript levels of TACE and TNF-alpha as well as TACE protein expression were significantly upregulated in direct, but not in indirect, coculture condition. Addition of human recombinant TACE promoted gene expression of endothelial specific markers including vWF, CD31, VE-cadherin, Flk-1, and Flt-1 in the differentiating MSCs. Furthermore, inhibition of TACE with TAPI-2 or inhibition of TNF-alpha with Etanercept attenuated endothelial differentiation of MSCs in the direct coculture condition. We demonstrated for the first time that direct MSCs-rBMECs interaction stimulated the endothelial differentiation of MSCs via TACE/TNFalpha signaling.