Mechanical stresses play an important role in regulating tissue differentiation in a variety of contexts during skeletal development and regeneration. It has been shown that some intermittent loading at a fracture site can accelerate secondary fracture healing. However, it has not been shown how the stress and strain histories resulting from mechanical loading of a fracture might, in some cases, inhibit normal fracture healing and induce pseudarthrosis formation. In this study, finite element analysis is used to calculate hydrostatic stress and maximum principal tensile strain patterns in regenerating tissue around the site of an oblique fracture. Using a mechanobiologic view on tissue differentiation, we compared calculated stress and strain patterns within the fracture callus to the histomorphology of a typical oblique pseudarthrosis. Tissue differentiation predictions were consistent with the characteristic histomorphology of oblique pseudarthrosis: in the interfragmentary gap, tensile strains led to “cleavage” of the callus; at the ends of both fracture fragments, hydrostatic pressure and tensile strain caused fibrocartilage formation; and, at discrete locations of the periosteum at the oblique fracture ends, mild hydrostatic tension caused bone formation. We also found that discrete regions of high hydrostatic pressure correlated with locations of periosteal bone resorption. When previous findings with distraction osteogenesis are considered with these observations, it appears that low levels of hydrostatic pressure may be conducive to periosteal cartilage formation but high hydrostatic pressure may induce periosteal bone resorption during bone healing. We concluded that tissue differentiation in pseudarthrosis formation is consistent with concepts previously presented for understanding fracture healing, distraction osteogenesis, and joint formation. © 2001 Orthopaedic Research Society. Published by Elsevier Science Ltd. All rights reserved.