Transcription factor T-cell acute lymphocytic leukemia 1 (Tal-1) is essential for the specification of hematopoietic development. Mice lacking Tal1 fail to generate any hematopoietic precursors. Using our co-culture system with stromal cells, we demonstrate that enforced expression of the transcription factor PU.1 under tetracycline control in Tal1-null embryonic stem (ES) cells rescues the development of osteoclasts and macrophage-like phagocytes. It was low efficiency compared with wild-type ES cells; other hematopoietic lineage cells of granulocytes, B cells, mast cells, megakaryocytes, and erythroid cells were not generated. Osteoclasts developed in this culture were multinucleated and competent for bone resorption. Their development depended on macrophage colony-stimulating factor and receptor activator of nuclear factor kappaB ligand. The majority of cells with the potential to differentiate into osteoclasts expressed fetal liver kinase 1 (Flk-1) and could be isolated using anti-Flk-1 antibody. These results suggest that the expression of PU.1 is a critical event for osteoclastogenesis and that Tal-1 may lie upstream of PU.1 in a regulatory hierarchy during osteoclastogenesis.