Malignant peripheral nerve sheath tumor (MPNST), a highly aggressive Schwann cell (SC)-derived soft tissue sarcoma, arises from benign neurofibroma (NF); however, the identity, heterogeneity and origins of tumor populations remain elusive. Nestin+ cells have been implicated as tumor stem cells in MPNST; unexpectedly, single-cell profiling of human NF and MPNST and their animal models reveal a broad range of nestin-expressing SC lineage cells and dynamic acquisition of discrete cancer states during malignant transformation. We uncover a nestin-negative mesenchymal neural crest-like subpopulation as a previously unknown malignant stem-like state common to murine and human MPNSTs, which correlates with clinical severity. Integrative multiomics profiling further identifies unique regulatory networks and druggable targets against the malignant subpopulations in MPNST. Targeting key epithelial-mesenchymal transition and stemness regulators including ZEB1 and ALDH1A1 impedes MPNST growth. Together, our studies reveal the underlying principles of tumor cell-state evolution and their regulatory circuitries during NF-to-MPNST transformation, highlighting a hitherto unrecognized mesenchymal stem-like subpopulation in MPNST disease progression.