Kaposi's sarcoma (KS) is an angioproliferative and invasive tumor caused by Kaposi's sarcoma-associated herpesvirus (KSHV). The cellular origin of KS tumor cells remains contentious. Recently, evidence has accrued indicating that KS may arise from KSHV-infected mesenchymal stem cells (MSCs) through mesenchymal-to-endothelial transition (MEndT), but the transformation process has been largely unknown. In this study, we investigated the KSHV-mediated MEndT process and found that KSHV infection rendered MSCs incomplete endothelial lineage differentiation and formed hybrid mesenchymal/endothelial (M/E) state cells characterized by simultaneous expression of mesenchymal markers Nestin/PDGFRA/α-SAM and endothelial markers CD31/PDPN/VEGFR2. The hybrid M/E cells have acquired tumorigenic phenotypes in vitro and the potential to form KS-like lesions after being transplanted in mice under renal capsules. These results suggest a homology of KSHV-infected MSCs with Kaposi's sarcoma where proliferating KS spindle-shaped cells and the cells that line KS-specific aberrant vessels were also found to exhibit the hybrid M/E state. Furthermore, the genetic analysis identified KSHV-encoded FLICE inhibitory protein (vFLIP) as a crucial regulator controlling KSHV-induced MEndT and generating hybrid M/E state cells for tumorigenesis. Overall, KSHV-mediated MEndT that transforms MSCs to tumorigenic hybrid M/E state cells driven by vFLIP is an essential event in Kaposi's sarcomagenesis.