M yxoid round cell liposarcoma (MRCLS) is a common liposarcoma subtype characterized by a translocation that results in the fusion protein TLS:CHOP as well as by mixed adipocytic histopathology. Both the etiology of MRCLS and the mechanism of action of TLS:CHOP remain poorly understood. It was previously shown that ET-743, an antitumor compound with an unclear mechanism of action, is highly effective in patients with MRCLS. To identify the cellular origin of MRCLS, we engineered a mouse model in which TLS:CHOP was expressed under the control of a mesodermally restricted promoter (Prx1) in a p53-depleted background. This model resembled MRCLS histologically as well as functionally in terms of its specific adipocytic differentiation–based response to ET-743. Specifically, endogenous mesenchymal stem cells (MSCs) expressing TLS:CHOP developed into MRCLS in vivo. Gene expression and microRNA analysis of these MSCs showed that they were committed to adipocytic differentiation, but unable to terminally differentiate. We also explored the method of action of ET-743. ET-743 downregulated TLS:CHOP expression, which correlated with CEBPα expression and adipocytic differentiation. Furthermore, PPARγ agonists enhanced the differentiation process initiated by ET-743. Our work highlights how clinical observations can lead to the generation of a mouse model that recapitulates human disease and may be used to develop rational treatment combinations, such as ET-743 plus PPARγ agonists, for the treatment of MRCLS.