A new nodulation-defective mutant of Lotus japonicus does not initiate nodule cortical cell division in response to Mesorhizobium loti, but induces root hair deformation, Nod factor-induced calcium spiking, and mycorrhization. This phenotype, together with mapping data, suggested that the mutation could be in the ortholog of the Medicago truncatula NSP1 gene (MtNSP1). The sequence of the orthologous gene (LjNSP1) in the L. japonicus mutant (Ljnsp1-1) revealed a mutation causing a premature stop resulting in loss of the C-terminal 23 amino acids. We also sequenced the NSP2 gene from L. japonicus (LjNSP2). A mutant (Ljnsp2-3) with a premature stop codon was identified by TILLING showing a similar phenotype to Ljnsp1-1. Both LjNSP1 and LjNSP2 are predicted GRAS (GAI, RGA, SCR) domain transcriptional regulators. Transcript steady-state levels of LjNSP1 and LjNSP2 initially decreased and then increased following infection by M. loti. In hairy root transformations, LjNSP1 and MtNSP1 complemented both Mtnsp1-1 and Ljnsp1-1 mutants, demonstrating that these orthologous proteins have a conserved biochemical function. A Nicotiana benthamiana NSP1-like gene (NbNSP1) was shown to restore nodule formation in both Ljnsp1-1 and Mtnsp1-1 mutants, indicating that NSP1 regulators from legumes and non-legumes can propagate the Nod factor-induced signal, activating appropriate downstream targets. The L. japonicus nodules complemented with NbNSP1 contained some cells with abnormal bacteroids and could fix nitrogen. However, the NbNSP1-complemented M. truncatula nodules did not fix nitrogen and contained very few bacteria released from infection threads. These observations suggest that NSP1 is also involved in infection, bacterial release, and normal bacteroid formation in nodule cells.