Liposarcomas (LPSs) are the most common soft-tissue cancer. Because of the lack of animal models, the cellular origin and molecular regulation of LPS remain unclear. Here, we report that mice with adipocyte-specific activation of Notch signaling (Ad/N1ICD) develop LPS with complete penetrance. Lineage tracing confirms the adipocyte origin of Ad/N1ICD LPS. The Ad/N1ICD LPS resembles human dedifferentiated LPS in histological appearance, anatomical localization, and gene expression signature. Before transformation, Ad/N1ICD adipocytes undergo dedifferentiation that leads to lipodystrophy and metabolic dysfunction. Although concomitant Pten deletion normalizes the glucose metabolism of Ad/N1ICD mice, it dramatically accelerates the LPS prognosis and malignancy. Transcriptomes and lipidomics analyses indicate that Notch activation suppresses lipid metabolism pathways that supply ligands to Pparγ, the master regulator of adipocyte homeostasis. Accordingly, synthetic Pparγ ligand supplementation induces redifferentiation of Ad/N1ICD adipocytes and tumor cells, and prevents LPS development in Ad/N1ICD mice. Importantly, the Notch target HES1 is abundantly expressed in human LPS, and Notch inhibition suppresses the growth of human dedifferentiated LPS xenografts. Collectively, ectopic Notch activation is sufficient to induce dedifferentiation and tumorigenic transformation of mature adipocytes in mouse.