The potential of increasing bone mass and preventing fractures in osteoporosis using stem cell therapy is currently an area of intense focus. However, there are very little data available regarding the postfracture bony defect healing efficacy under osteoporotic conditions. This study aims to investigate whether critical-sized segmental bone defects in a rabbit model of osteoporosis could be repaired using an allogenic stem cell-based tissue engineering (TE) approach and to investigate the potential influence of osteoporosis on the treatment efficacy. Rabbit fetal bone marrow mesenchymal stem cells (BMSCs) were harvested and expanded in vitro. Decalcified bone matrix (DBM) scaffolds were then seeded with allogenic fetal BMSCs and cultivated in osteogenic media to engineer BMSC/DBM constructs. Critical-sized radial defects were created in ovariectomized (OVX) rabbits and the defects were repaired either by insertion of BMSC/DBM constructs or by DBM scaffolds alone. Also, nonovariectomized age-matched (non-OVX) rabbits were served as control. At 3 months post-treatment under the osteoporotic condition (OVX rabbits), the BMSC/DBM constructs inserted within the defect generated significantly more bone tissue when compared to the DBM scaffold as demonstrated by the X-ray, microcomputed tomography, and histological analyses. In addition, when compared to a normal nonosteoporotic condition (age-matched non-OVX rabbits), the defect treatment efficacy was adversely affected by the osteoporotic condition with significantly less bone regeneration. This study demonstrated the potential of allogenic fetal BMSC-based TE strategy for repairing bone defects in an osteoporotic condition. However, the treatment efficacy could be considerably compromised in the OVX animals. Therefore, a more sophisticated strategy that addresses the complicated pathogenic conditions associated with osteoporosis is needed.