Increasing evidence on cancer stem cells suggest that stem cells are susceptive to carcinogenesis and consequently can be the origin of many cancers. We have recently established a telomerase-transduced human mesenchymal stem cell line and subsequently irradiated this in order to achieve malignant transformation. In the present study, we analyzed the long-term effect of ionizing radiation on these cells and investigate whether radiation can trigger tumor development. The cells were irradiated with a low (2.5 Gy) and a high (15 Gy) dose of γ-rays and followed for up to 6 months after radiation. A subclone of the cells irradiated with 2.5 Gy of γ-rays formed tumors after implantation to severe combined immunodeficiency mice. During the process of transformation, the cells showed accelerated telomere shortening, increased levels of anaphase bridges and a shift from balanced to unbalanced translocations. The tumor suppressor genes p53 and p21^CIP1 functioned normally throughout the study. Our observations indicate that radiation destabilized the telomeres and that the presence of uncapped telomeres initiated fusion-break-fusion cycles, resulting in increased chromosomal instability and tumor formation. Thus, bone marrow-derived human mesenchymal stem cells are capable of exhibiting a malignant phenotype.