Bone marrow stromal stem cells differentiate into many different types of cells including osteoblasts and adipocytes. Long‐term glucocorticoid treatment decreases osteoblastic activity but increases adipocytes. We investigated the mechanism of glucocorticoid‐induced PPARγ2 transcription. Treatment of human bone marrow stromal cells with dexamethasone induced the differentiation of these cells into adipocytes as measured by oil‐red O staining, and Northern blot analysis showed that dexamethasone strongly induced PPARγ2 mRNA expression in cells cultured in adipocyte induction medium. Moreover, the mRNA of C/EBPδ, an adipocyte‐promoting transcription factor, was also induced by dexamethasone in the presence of induction medium. Gel mobility shift assays using purified GST‐C/EBPδ fusion protein showed that C/EBPδ specifically binds to a 40‐base pair DNA element from PPARγ2 promoter, which was found to contain a tandem repeat of C/EBP binding sites. Transfection studies in mouse mesenchymal C3H10T1/2 cells showed that it is the tandem repeat of the C/EBP binding site in PPARγ2 promoter region that regulates dexamethasone‐mediated PPARγ2 gene activation. We conclude that glucocorticoid‐induced adipogenesis from bone marrow stromal cells is mediated through a reaction cascade in which dexamethasone transcriptionally activates C/EBPδ; C/EBPδ then binds to PPARγ2 promoter and transactivates PPARγ2 gene expression. This activated master regulator, in turn, initiates the adipocyte differentiation. J. Cell. Biochem. 76:518–527, 2000. © 2000 Wiley‐Liss, Inc.