Mature adipocytes and myocytes are derived from a common mesenchymal precursor. While IGF-1 promotes the differentiation of both cell types, the signaling pathways that specify the distinct cell fates are largely unknown. Here, we show that the Rho GTPase and its regulator, p190-B RhoGAP, are components of a critical switch in the adipogenesis-myogenesis "decision." Cells derived from embryos lacking p190-B RhoGAP exhibit excessive Rho activity, are defective for adipogenesis, but undergo myogenesis in response to IGF-1 exposure. In vitro, activation of Rho-kinase by Rho inhibits adipogenesis and is required for myogenesis. The activation state of Rho following IGF-1 signaling is determined by the tyrosine-phosphorylation status of p190-B RhoGAP and its resulting subcellular relocalization. Moreover, adjusting Rho activity is sufficient to alter the differentiation program of adipocyte and myocyte precursors. Together, these results identify the Rho GTPase as an essential modulator of IGF-1 signals that direct the adipogenesis-myogenesis cell fate decision.