Here, we show that Src homology 2-domain-containing inositol 5'-phosphatase 1 (SHIP1) is required for the efficient development of osteoblasts from mesenchymal stem cells (MSCs) such that bone growth and density are reduced in mice that lack SHIP1 expression in MSCs. We find that SHIP1 promotes the osteogenic output of MSCs by limiting activation of the PI3K/Akt/β-catenin pathway required for induction of the MSC stemness factor Id2. In parallel, we demonstrate that mice with myeloid-restricted ablation of SHIP1, including osteoclasts (OCs), show no reduction in bone mass or density. Hence, diminished bone mass and density in the SHIP1-deficient mice results from SHIP deficiency in MSC and osteolineage progenitors. Intriguingly, mice with a SHIP-deficient MSC compartment also exhibit decreased OC numbers. In agreement with our genetic findings we also show that treatment of mice with an SHIP1 inhibitor (SHIPi) significantly reduces bone mass. These findings demonstrate a novel role for SHIP1 in MSC fate determination and bone growth. Further, SHIPi may represent a novel therapeutic approach to limit bone development in osteopetrotic and sclerotic bone diseases.