Cell fate is determined by intrinsic programs and external cues, such as soluble signals and cell–cell contact. Previous studies have demonstrated the roles of soluble factors in the proliferation and differentiation of cortical stem cells and cell–cell contact in maintaining stem cells in a proliferative state. In the present study, we focused on the effect of cell–cell interaction on cell-fate determination. We found that density could exert a strong influence on the cell-type composition when cortical stem cells differentiate. Multipotent stem cells, which normally gave rise to neurons, astrocytes, and oligodendrocytes under high-density culture condition, differentiated almost exclusively into smooth muscle at low density. Clonal analysis indicated that smooth muscle and astrocytes were derived from a common precursor and that the density effect on cell types used an instructive mechanism on the choice of fate rather than an effect of selective survival and/or proliferation. This instructive mechanism depended on the local and not the average density of the cells. This local signal could be mimicked by membrane extract. These findings demonstrate the importance of membrane-bound signals in specifying lineage and provide the first evidence for a short-range regulatory mechanism in cortical stem cell differentiation.