This study utilized both in vivo and in vitro techniques to investigate whether cells of bone marrow origin can differentiate into smooth muscle-like cells (myofibroblasts) with contractile filaments and proteins. Female C57BL/6 mice expressing the Ly5.2 antigen on the surface of their haemopoietic cells had four pieces of silastic tubing (3 × 0.5 mm outer diameter) or boiled blood clot (2–3 mm diameter) placed in their peritoneal cavity. After 3, 5, 7 and 14 days (n = 4/group) the implants were removed and those that had remained free-floating were processed for light microscopy, immunohistochemistry and electron microscopy. In the first 3–5 days, rounded cells adhered to the entire surface of the tubing then flattened. These cells stained with fluoresceinated antibodies to Ly5.2 showing that they were derived from haemopoietic cells. By 14 days the cells had become elongated and multilayered in a collagen matrix, forming a thick tissue capsule around the tubing or boiled clot. They contained contractile filaments and stained with antibodies to α-smooth muscle actin but no longer stained for Ly5.2. A separate set of female C57BL/6 Ly5.2 mice were X-irradiated to destroy bone marrow then immediately transfused with 10<sup>6</sup> nucleated bone marrow cells taken from the femur and tibia of a congenic strain of male mice expressing the Ly5.1 allele. Eight of the female mice with successful engraftment (80–99%) had silastic tubing implanted in the peritoneal cavity. After 14 days, in situ hybridization with Y chromosome probe confirmed the male donor, and thus bone marrow, origin of the elongated cells that formed the capsule. In vitro studies showed that cells of the murine macrophage cell lines RAW 264.7 and J774 express α-smooth muscle actin after exposure to the cytokine γ-interferon in vitro. These data show that bone marrow-derived cells can differentiate into smooth muscle-like cells and raises the possibility that blood-derived cells may contribute to the development of fibro-proliferative vascular diseases such as atherosclerosis.