Loss of terminal differentiation is a hallmark of cancer and offers a potential mechanism for differentiation therapy. Polycomb repressive complex 2 (PRC2) serves as the methyltransferase for K27 of histone H3 that is crucial in development. While PRC2 inhibitors show promise in treating various cancers, the underlying mechanisms remain incompletely understood. Here, we demonstrated that the inhibition or depletion of PRC2 enhanced adipocyte differentiation in malignant rhabdoid tumors and mesenchymal stem cells, through upregulation of peroxisome proliferator-activated receptor gamma (PPARG) and CEBPA. Mechanistically, PRC2 directly represses their transcription through H3K27 methylation, as both genes exhibit a bivalent state in mesenchymal stem cells. KO of PPARG compromised C/EBPα expression and impeded the PRC2 inhibitor-induced differentiation into adipocytes. Furthermore, the combination of the PPARγ agonist rosiglitazone and the PRC2 inhibitor MAK683 exhibited a higher inhibition on Ki67 positivity in tumor xenograft compared to MAK683 alone. High CEBPA, PLIN1, and FABP4 levels positively correlated with favorable prognosis in sarcoma patients in The Cancer Genome Atlas cohort. Together, these findings unveil an epigenetic regulatory mechanism for PPARG and highlight the essential role of PPARγ and C/EBPα in the adipocyte differentiation of malignant rhabdoid tumors and sarcomas with a potential clinical implication.