Knowledge of the stromal microenvironment is crucial for understanding the hematopoietic system. We took advantage of an assay that permits analysis of primary stroma-initiating cells (SICs) on the clonal level, and further characterized SICs and the factors that regulate SICs. Stroma formation in this assay is dependent on a high-molecular-weight factor secreted by the stromal cell line AC3.U. Here we show that this factor is identical to macrophage colony-stimulating factor (M-CSF), and that purified M-CSF is sufficient for induction of stroma formation. M-CSF, isolated from the line AC3.U, as well as from L929 cells and COS cells transfected with an expression vector encoding M-CSF, migrated in two peaks as 160- and 650-kD species after gel filtration. These molecular-weight species encompassed all stroma-inducing activity, and both stimulated macrophage colony formation. Affinity chromatography and blocking studies with antibodies specific for M-CSF and c-fms confirmed M-CSF as the sole factor in the supernatant of the stromal cell line AC3.U that promotes stroma formation. Culture of marrow, for as little as 1 week, depleted M-CSF-dependent SIC while increasing the incidence of replatable, factor-independent SIC. This suggests that culture changes the properties of SICs, perhaps by inducing differentiation into mature stromal cells. Thus, our results show a novel function of M-CSF as an important modulator of stroma formation.