Histone deacetylase (Hdac)3 is a nuclear enzyme that contributes to epigenetic programming and is required for embryonic development. To determine the role of Hdac3 in bone formation, we crossed mice harboring loxP sites around exon 7 of Hdac3 with mice expressing Cre recombinase under the control of the osterix promoter. The resulting Hdac3 conditional knockout (CKO) mice were runted and had severe deficits in intramembranous and endochondral bone formation. Calvarial bones were significantly thinner and trabecular bone volume in the distal femur was decreased 75% in the Hdac3 CKO mice due to a substantial reduction in trabecular number. Hdac3-CKO mice had fewer osteoblasts and more bone marrow adipocytes as a proportion of tissue area than their wildtype or heterozygous littermates. Bone formation rates were depressed in both the cortical and trabecular regions of Hdac3 CKO femurs. Microarray analyses revealed that numerous developmental signaling pathways were affected by Hdac3-deficiency. Thus, Hdac3 depletion in osterix-expressing progenitor cells interferes with bone formation and promotes bone marrow adipocyte differentiation. These results demonstrate that Hdac3 inhibition is detrimental to skeletal health.