Identification of a reliable marker of skeletal precursor cells within calcified and soft tissues remains a major challenge for the field. To address this, we used a transgenic model in which osteoblasts can be eliminated by pharmacological treatment. Following osteoblast ablation a dramatic increase in a population of alpha-smooth muscle actin (alpha-SMA) positive cells was observed. During early recovery phase from ablation we have detected cells with the simultaneous expression of alpha-SMA and a preosteoblastic 3.6GFP marker, indicating the potential for transition of alpha-SMA+ cells towards osteoprogenitor lineage. Utilizing alpha-SMAGFP transgene, alpha-SMAGFP+ positive cells were detected in the microvasculature and in the osteoprogenitor population within bone marrow stromal cells. Osteogenic and adipogenic induction stimulated expression of bone and fat markers in the alpha-SMAGFP+ population derived from bone marrow or adipose tissue. In adipose tissue, alpha-SMA+ cells were localized within the smooth muscle cell layer and in pericytes. After in vitro expansion, alpha-SMA+/CD45-/Sca1+ progenitors were highly enriched. Following cell sorting and transplantation of expanded pericyte/myofibroblast populations, donor-derived differentiated osteoblasts and new bone formation was detected. Our results show that cells with a pericyte/myofibroblast phenotype have the potential to differentiate into functional osteoblasts.