Hindgut-derived endoderm can differentiate into rectal, prostatic, and bladder phenotypes. Stromal-epithelial interactions are crucial for this development; however, the precise mechanisms by which epithelium responds to stromal cues remain unknown. We have previously reported ectopic expression of peroxisome proliferator-activated receptor-γ2 (PPARγ2) increased androgen receptor expression and promoted differentiation of mouse prostate epithelium. PPARγ is also implicated in urothelial differentiation. Herein we demonstrate that knockdown of PPARγ2 in benign human prostate epithelial cells (BHPrEs) promotes urothelial transdifferentiation. Furthermore, in vitro and in vivo heterotypic tissue regeneration models with embryonic bladder mesenchyme promoted urothelial differentiation of PPARγ2-deficient BHPrE cells, and deficiency of both PPARγ isoforms 1 and 2 arrested differentiation. Because PTEN deficiency is cooperative in urothelial pathogenesis, we engineered BHPrE cells with combined knockdown of PPARγ and PTEN and performed heterotypic recombination experiments using embryonic bladder mesenchyme. Whereas PTEN deficiency alone induced latent squamous differentiation in BHPrE cells, combined PPARγ and PTEN deficiency accelerated the development of keratinizing squamous metaplasia (KSM). We further confirmed via immunohistochemistry that gene expression changes in metaplastic recombinants reflected human urothelium undergoing KSM. In summary, these data suggest that PPARγ isoform expression provides a molecular basis for observations that adult human epithelium can be transdifferentiated on the basis of heterotypic mesenchymal induction. These data also implicate PPARγ and PTEN inactivation in the development of KSM.