We studied the function of osteoblast cadherins in vivo by transgenic expression of a truncated N-cadherin with dominant-negative action, driven by an osteoblast-specific promoter (OG2-NcadDeltaC). During the first 3 months of life, bone mineral density was reduced, whereas percent body fat was increased in transgenic animals compared with wild-type littermates, with associated decreased bone formation rate and osteoblast number, but normal osteoclast number. Osteoblast differentiation was delayed in calvaria cells isolated from transgenic mice. Likewise, the number of osteoblast precursors in bone marrow stromal cells from OG2-NcadDeltaC mice was decreased compared with wild-type cultures, whereas the number of adipogenic precursors was increased. In vitro, a transcriptionally active beta-catenin mutant reversed the delay in osteoblast differentiation and the exuberant adipogenesis. Thus, in vivo disruption of cadherin function hinders osteoblast differentiation and favors, indirectly, bone marrow progenitor cell commitment to the alternative adipogenic lineage via interference with beta-catenin signaling. This results in decreased bone formation, delayed acquisition of peak bone mass and increased body fat.