The prevascularization of tissue-engineered bone grafts (TEBGs) has been shown to accelerate capillary vessel ingrowth in bone defect remodeling and to enhance new bone formation. However, the exact mechanisms behind this positive effect remain unknown. Here, we report that basic fibroblast growth factor (FGF2)-Ras homolog gene family member A (RhoA)/Rho-associated protein kinase (ROCK) signaling functions as a molecular switch to regulate the lineage fate of bone mesenchymal stem cells (BMSCs) and that prevascularization promotes the cell fate switch, which contributes to increased bone regeneration with the use of prevascularized TEBGs compared with control TEBGs. Prevascularized TEBGs enhanced the in vivo endothelial differentiation of BMSCs by inhibiting RhoA/ROCK signaling. In vitro data more clearly showed that BMSCs differentiated into von Willebrand factor (vWF)-positive endothelial cells, and FGF2-induced inhibition of RhoA/ROCK signaling played a key role. Our novel findings uncovered a new mechanism that stimulates the increased vascularization of engineered bone and enhanced regeneration by promoting the endothelial differentiation of BMSCs implanted in TEBGs. These results offer a new molecular target to regulate TEBG-induced bone regeneration.