Signaling by tumor necrosis factor (TNF)-related activation-induced cytokine (TRANCE) is essential for the differentiation of monocytes/macrophages into osteoclasts. We show here that TRANCE selectively activates Rac1, but not Rac2 in osteoclast precursors. Expression of a dominant interfering mutant of TNF receptor-associated factor (TRAF)6 blocks TRANCE-mediated Rac1 activation, indicating that Rac1 lies downstream of TRAF6. Osteoclast precursors expressing a dominant negative Rac1N17 are defective in TRANCE-induced IKK activation and IkappaBalpha degradation resulting in inhibition of NFkappaB-dependent reporter gene activity. In addition, Rac1 acts upstream of TAK1 to induce NF-kappaB activation and is required for the normal differentiation of osteoclast precursors. Thus, Rac1 may represent a key regulator for differentiation of osteoclasts through the activation of NF-kappaB.