Nuclear receptor peroxisome proliferator-activated receptor-γ (PPARγ) is an essential transcription factor for adipocyte differentiation. In mesenchymal stem cells, PPARγ has been assumed to play a negative role in osteoblastic differentiation, by working in an adipogenesis dependent manner, due to the reciprocal relationship between osteoblast and adipocyte differentiation. However, the direct role of PPARγ in osteoblast function is not fully understood, due in part to inadequate model systems. Here, we describe an adenoviral-mediated PPARγ knockout system in which suppression of PPARγ in mesenchymal stem cells enhanced osteoblast differentiation and inhibited adipogenesis in vitro. Consistent with this in vitro observation, lipoatrophic A-ZIP/F1 mice, which do not form adipocytes, displayed a phenotype in which both cortical and trabecular bone was significantly increased compared with wild-type mice. We next developed an inducible osteoblast-targeted PPARγ knockout (Osx Cre/flox- PPARγ) mouse to determine the direct role of PPARγ in bone formation. Data from both in vitro cultures of mesenchymal stem cells and in vivo µCT analysis of bones suggest that suppression of PPARγ activity in osteoblasts significantly increased osteoblast differentiation and trabecular number. Endogenous PPARγ in mesenchymal stem cells and osteoblasts strongly inhibited Akt/mammalian target of rapamycin (mTOR)/p70S6k activity and led to decreased osteoblastic differentiation. Therefore, we conclude that PPARγ modulates osteoblast differentiation and bone formation through both direct and indirect mechanisms. The direct mode, as shown here, involves PPARγ regulation of the mTOR pathway, while the indirect pathway is dependent on the regulation of adipogenesis.