Transplantation of collagenous matrix from the rat diaphyseal bone to subcutaneous sites resulted in new bone formation by an endochondral sequence. Functional bone marrow develops within the newly formed ossicle. On day 1, the implanted matrix was a discrete conglomerate with fibrin clot and polymorphonuclear leukocytes. By day 3, the leukocytes disappeared, and this event was followed by migration and close apposition of fibroblast cell surface to the collagenous matrix. This initial matrix-membrane interaction culminated in differentiation of fibroblasts to chondroblasts and osteoblasts. The calcification of the hypertrophied chondrocytes and new bone formation were correlated with increased alkaline phosphatase activity and 45Ca incorporation. The ingrowth of capillaries on day 9 resulted in chondrolysis and osteogenesis. Further remodelling of bony trabeculae by osteoclasts resulted in an ossicle of cancellous bone. This was followed by emergence of extravascular islands of hemocytoblasts and their differentiation into functional bone marrow with erythropoietic and granulopoietic elements and megakaryocytes in the ossicle. The onset and maintenance of erythropoiesis in the induced bone marrow were monitored by 59Fe incorporation into protein-bound heme. These findings imply a role for extracellular collagenous matrix in cell differentiation.

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