Background The leading cause of mortality for patients with the neurofibromatosis type 1 (NF1) cancer predisposition syndrome is the development of malignant peripheral nerve sheath tumor (MPNST), an aggressive soft tissue sarcoma. In the setting of NF1, this cancer type frequently arises from within its common and benign precursor, plexiform neurofibroma (PN). Transformation from PN to MPNST is challenging to diagnose due to difficulties in distinguishing cross-sectional imaging results and intralesional heterogeneity resulting in biopsy sampling errors. Methods and findings This multi-institutional study from the National Cancer Institute and Washington University in St. Louis used fragment size analysis and ultra-low-pass whole genome sequencing (ULP-WGS) of plasma cell-free DNA (cfDNA) to distinguish between MPNST and PN in patients with NF1. Following in silico enrichment for short cfDNA fragments and copy number analysis to estimate the fraction of plasma cfDNA originating from tumor (tumor fraction), we developed a noninvasive classifier that differentiates MPNST from PN with 86% pretreatment accuracy (91% specificity, 75% sensitivity) and 89% accuracy on serial analysis (91% specificity, 83% sensitivity). Healthy controls without NF1 (participants = 16, plasma samples = 16), PN (participants = 23, plasma samples = 23), and MPNST (participants = 14, plasma samples = 46) cohorts showed significant differences in tumor fraction in plasma (P = 0.001) as well as cfDNA fragment length (P < 0.001) with MPNST samples harboring shorter fragments and being enriched for tumor-derived cfDNA relative to PN and healthy controls. No other covariates were significant on multivariate logistic regression. Mutational analysis demonstrated focal NF1 copy number loss in PN and MPNST patient plasma but not in healthy controls. Greater genomic instability including alterations associated with malignant transformation (focal copy number gains in chromosome arms 1q, 7p, 8q, 9q, and 17q; focal copy number losses in SUZ12, SMARCA2, CDKN2A/B, and chromosome arms 6p and 9p) was more prominently observed in MPNST plasma. Furthermore, the sum of longest tumor diameters (SLD) visualized by cross-sectional imaging correlated significantly with paired tumor fractions in plasma from MPNST patients (r = 0.39, P = 0.024). On serial analysis, tumor fraction levels in plasma dynamically correlated with treatment response to therapy and minimal residual disease (MRD) detection before relapse. Study limitations include a modest MPNST sample size despite accrual from 2 major referral centers for this rare malignancy, and lack of uniform treatment and imaging protocols representing a real-world cohort. Conclusions Tumor fraction levels derived from cfDNA fragment size and copy number alteration analysis of plasma cfDNA using ULP-WGS significantly correlated with MPNST tumor burden, accurately distinguished MPNST from its benign PN precursor, and dynamically correlated with treatment response. In the future, our findings could form the basis for improved early cancer detection and monitoring in high-risk cancer-predisposed populations.