Osteoclasts are essential cells for bone erosion in inflammatory arthritis and are derived from cells in the myeloid lineage. Recently, we reported that tumor necrosis factor-alpha (TNFalpha) increases the blood osteoclast precursor (OCP) numbers in arthritic patients and animals, which are reduced by anti-TNF therapy, implying that circulating OCPs may have an important role in the pathogenesis of erosive arthritis. The aim of this study is to investigate the mechanism by which TNFalpha induces this increase in OCP frequency. We found that TNFalpha stimulated cell division and conversion of CD11b+/Gr-1-/lo/c-Fms- to CD11b+/Gr-1-/lo/c-Fms+ cells, which was not blocked by neutralizing macrophage colony-stimulating factor (M-CSF) antibody. Ex vivo analysis of monocytes demonstrated the following: (i) blood CD11b+/Gr-1-/lo but not CD11b-/Gr-1- cells give rise to osteoclasts when they were cultured with receptor activator NF-kappaB ligand and M-CSF; and (ii) TNF-transgenic mice have a significant increase in blood CD11b+/Gr-1-/lo cells and bone marrow proliferating CD11b+/Gr-1-/lo cells. Administration of TNFalpha to wild type mice induced bone marrow CD11b+/Gr-1-/lo cell proliferation, which was associated with an increase in CD11b+/Gr-1-/lo OCPs in the circulation. Thus, TNFalpha directly stimulates bone marrow OCP genesis by enhancing c-Fms expression. This results in progenitor cell proliferation and differentiation in response to M-CSF, leading to an enlargement of the marrow OCP pool. Increased marrow OCPs subsequently egress to the circulation, forming a basis for elevated OCP frequency. Therefore, the first step of TNF-induced osteoclastogenesis is at the level of OCP genesis in the bone marrow, which represents another layer of regulation to control erosive disease.