Background: Transforming growth factor-β (TGF-β) plays a key role in bone metastasis formation; we hypothesized the possible involvement of TGF-β in the induction of cancer stem cells (CSCs) in the bone microenvironment (micro-E), which may be responsible for chemo-resistance. Methods: Mouse mammary tumor cells were implanted under the dorsal skin flap over the calvaria and into a subcutaneous (subQ) lesions in female mice, generating tumors in the bone and subQ micro-Es. After implantation of the tumor cells, mice were treated with a TGF-β R1 kinase inhibitor (R1-Ki). Results: Treatment with R1-Ki decreased tumor volume and cell proliferation in the bone micro-E, but not in the subQ micro-E. R1-Ki treatment did not affect the induction of necrosis or apoptosis in either bone or subQ micro-E. The number of cells positive for the CSC markers, SOX2, and CD166 in the bone micro-E, were significantly higher than those in the subQ micro-E. R1-Ki treatment significantly decreased the number of CSC marker positive cells in the bone micro-E but not in the subQ micro-E. TGF-β activation of the MAPK/ERK and AKT pathways was the underlying mechanism of cell proliferation in the bone micro-E. BMP signaling did not play a role in cell proliferation in either micro-E. Conclusion: Our results indicated that the bone micro-E is a key niche for CSC generation, and TGF-β signaling has important roles in generating CSCs and tumor cell proliferation in the bone micro-E. Therefore, it is critically important to evaluate responses to chemotherapeutic agents on both cancer stem cells and proliferating tumor cells in different tumor microenvironments in vivo.