TNF induces bone loss in common bone diseases by promoting osteoclast formation directly and indirectly, but it also limits osteoclast formation by inducing expression of NF-κB p100. Osteoclast precursors (OCPs) are derived from M1 (inflammatory) and M2 (resident) macrophages. However, it is not known if TNF stimulates or limits osteoclast formation through regulation of M1 or M2 differentiation or if RelB, a partner of p100, is involved. To investigate these questions, we treated bone marrow cells (BMCs) with M-CSF alone or in combination with TNF to enrich for OCPs, which we called M-OCPs and T-OCPs, respectively. We found that TNF switched CD11b+F4/80+ M-OCPs from Ly6C-Gr1- M2 to Ly6C+Gr1-CD11c+ and Ly6C-Gr1-CD11c+ M1 cells. RANKL induced osteoclast formation from both Ly6C+Gr1- and Ly6C-Gr1- T-OCPs, but only from Ly6C+Gr1- M-OCPs, which formed significantly fewer osteoclasts than T-OCPs. Importantly, Ly6C+Gr1- cells from both M- and T-OCPs have increased expression of the M1 marker genes, iNOS, TNF, IL-1β and TGFβ1, compared to Ly6C-Gr1- cells, and Ly6C-Gr1- cells from T-OCPs also have increased expression of iNOS and TGFβ1 compared to cells from M-OCPs. Both RANKL and TNF increased RelB mRNA expression. TNF significantly increased RelB protein levels, but RANKL did not because it also induced RelB proteasomal degradation. TNF inhibited RANKL-induced NFATc1 mRNA expression and osteoclast formation from M-OCPs, but not from T-OCPs, and it did not induce Ly6C+Gr1-CD11c+ or Ly6C-Gr1-CD11c+ M1 macrophages from RelB-/- BMCs. Furthermore, overexpression of RelB in M-OCPs reduced RANKL-induced osteoclast formation and NFATc1 mRNA expression, but it increased TNF-induced OC formation without affecting NFATc1 levels. Thus, TNF induction of RelB directly mediates terminal osteoclast differentiation independent of NFATc1 and limits RANKL-induced osteoclastogenesis by inhibiting NFATc1 activation. However, the dominant role of TNF is to expand the OCP pool by switching the differentiation of M-CSF-induced M2 to M1 macrophages with enhanced osteoclast forming potential. Strategies to degrade RelB could prevent TNF-induced M2/M1 switching and reduce osteoclast formation.