Information on isolation, characterization of rabbit MSC and its evaluation in critical bone defect (CSD) is scarcely available. Here, we attempted to isolate, proliferate, differentiate, characterize and evaluate the in vivo osteogenic potential of bone marrow derived mesenchymal stem cells (BMSCs) collected from New Zealand White rabbits. They were isolated and proliferated in antibiotic supplemented DMEM (Dulbecco’s Modified Eagle’s media). Osteogenic differentiation of rabbit bone marrow derived mesenchymal stem cells (rBMSCs) was induced by osteogenic supplements and evaluated by alizarin red staining and alkaline phosphatase activity assay and characterized by specific CD surface antigen markers through FACS (Fluorescent activated cell shorting) and RT-PCR. Day ‘0’ cells were round/oval and floating, and on day 3-5, cell attachment with spindle/polygonal/star morphology was seen. On subsequent passages, they assumed uniform spindle shaped morphology. After culturing in respective differentiation media rBMSCs showed increased alkaline phosphatase activity, intense alizarin red staining, blue staining for Alcian blue and deep red colour on oil red O staining supporting the osteogenic, chondrogenic and adipogenic differentiation ability. In vivo osteogenic potential of rBMSCs was evaluated in a 30 mm critical sized defect of rabbit radius. The cellular morphology of plastic adherent cells was seen as single cell form in P0 and in P1, P2 and P3, as elongated/spindle-shape in clusters. The rBMSCs were positive for CD44, CD73 and CD105 and negative for CD34 and CD45 and could differentiate to osteogenic cells in osteogenic induction media. The in vivo experiments in rabbit CSD model confirmed that rBMSCs promote faster healing of critical size defects. Hence, we may suggest that rBMSCs are suitable for bone formation in fracture healing and non-union.