During vertebrate development, neural crest stem cells (NCSCs) give rise to neural cells of the peripheral nervous system and to a variety of mesenchymal cell types, including smooth muscle, craniofacial chondrocytes, and osteocytes. Consistently, mesenchymal stem cells (MSCs) have recently been shown to derive in part from the neural crest (NC), although the mechanisms underlying MSC generation remains to be identified. Here, we show that transforming growth factor b (TGFb)-mediated suppression of the NCSC transcription factor Sox10 induces a switch in neural to mesenchymal potential in NCSCs. In vitro and in vivo, TGFb signal inactivation results in persistent Sox10 expression, decreased cell cycle exit, and perturbed generation of mesenchymal derivatives, which eventually leads to defective morphogenesis. In contrast, TGFb-mediated downregulation of Sox10 or its genetic inactivation suppresses neural potential, confers mesenchymal potential to NC cells in vitro, and promotes cell cycle exit and precocious mesenchymal differentiation in vivo. Thus, negative regulation of Sox10 by TGFb signaling promotes the generation of mesenchymal progenitors from NCSCs. Our study might lay the grounds for future applications demanding defined populations of MSCs for regenerative medicine. STEM CELLS 2011;29:689-699 Disclosure of potential conflicts of interest is found at the end of this article.