Alterations in the gastrointestinal microbiota have been implicated in obesity in mice and humans, but the key microbial functions influencing host energy metabolism and adiposity remain to be determined. Despite an increased understanding of the genetic content of the gastrointestinal microbiome, functional analyses of common microbial gene sets are required. We established a controlled expression system for the parallel functional analysis of microbial alleles in the murine gut. Using this approach we show that bacterial bile salt hydrolase (BSH) mediates a microbe–host dialogue that functionally regulates host lipid metabolism and plays a profound role in cholesterol metabolism and weight gain in the host. Expression of cloned BSH enzymes in the gastrointestinal tract of gnotobiotic or conventionally raised mice significantly altered plasma bile acid signatures and regulated transcription of key genes involved in lipid metabolism (Pparγ, Angptl4), cholesterol metabolism (Abcg5/8), gastrointestinal homeostasis (RegIIIγ), and circadian rhythm (Dbp, Per1/2) in the liver or small intestine. High-level expression of BSH in conventionally raised mice resulted in a significant reduction in host weight gain, plasma cholesterol, and liver triglycerides, demonstrating the overall impact of elevated BSH activity on host physiology. In addition, BSH activity in vivo varied according to BSH allele group, indicating that subtle differences in activity can have significant effects on the host. In summary, we demonstrate that bacterial BSH activity significantly impacts the systemic metabolic processes and adiposity in the host and represents a key mechanistic target for the control of obesity and hypercholesterolemia.