The Src homology (SH)2-containing inositol 5-phosphatase (SHIP) negatively regulates a variety of immune responses through inhibitory immune receptors. In SHIP(-/-) animals, we found that the number of early lymphoid progenitors in the bone marrow was significantly reduced and accompanied by expansion of myeloid cells. We exploited an in vitro system using hematopoietic progenitors that reproduced the in vivo phenotype of SHIP(-/-) mice. Lineage-negative marrow (Lin(-)) cells isolated from wild-type mice failed to differentiate into B cells when cocultured with those of SHIP(-/-) mice. Furthermore, culture supernatants of SHIP(-/-) Lin(-) cells suppressed the B lineage expansion of wild-type lineage-negative cells, suggesting the presence of a suppressive cytokine. SHIP(-/-) Lin(-) cells contained more IL-6 transcripts than wild-type Lin(-) cells, and neutralizing anti-IL-6 antibody rescued the B lineage expansion suppressed by the supernatants of SHIP(-/-) Lin(-) cells. Finally, we found that addition of recombinant IL-6 to cultures of wild-type Lin(-) bone marrow cells reproduced the phenotype of SHIP(-/-) bone marrow cultures: suppression of B cell development and expansion of myeloid cells. The results identify IL-6 as an important regulatory cytokine that can suppress B lineage differentiation and drive excessive myeloid development in bone marrow.