We have previously shown that human prostate cancer cells are capable of acquiring malignant attributes through interaction with stromal cells in the tumor microenvironment, while the interacting stromal cells can also become affected with both phenotypic and genotypic alterations. This study used a co-culture model to investigate the mechanism underlying the co-evolution of cancer and stromal cells. Red fluorescent androgen-dependent LNCaP prostate cancer cells were cultured with a matched pair of normal and cancer-associated prostate myofibroblast cells to simulate cancer-stromal interaction, and cellular changes in the co-culture were documented by tracking the red fluorescence. We found frequent spontaneous fusions between cancer and stromal cells throughout the co-culture. In colony formation assays assessing the fate of the hybrid cells, most of the cancer-stromal fusion hybrids remained growth-arrested and eventually perished. However, some of the hybrids survived to form colonies from the co-culture with cancer-associated stromal cells. These derivative clones showed genomic alterations together with androgen-independent phenotype. The results from this study reveal that prostate cancer cells are fusogenic, and cancer-stromal interaction can lead to spontaneous fusion between the two cell types. While a cancer-stromal fusion strategy may allow the stromal compartment to annihilate invading cancer cells, certain cancer-stromal hybrids with increased survival capability may escape annihilation to form a derivative cancer cell population with an altered genotype and increased malignancy. Cancer-stromal fusion thus lays a foundation for an incessant co-evolution between cancer and the cancer-associated stromal cells in the tumor microenvironment.