The neuropeptide Y (NPY) system has been implicated in the regulation of bone homeostasis and osteoblast activity, but the mechanism behind this is unclear. Here we show that Y1 receptor signaling is directly involved in the differentiation of mesenchymal progenitor cells isolated from bone tissue, as well as the activity of mature osteoblasts. Importantly, the mRNA levels of two key osteogenic transcription factors, runx2 and osterix, as well as the adipogenic transcription factor PPAR-gamma, were increased in long bones of Y1(-/-) mice compared with wild-type mice. In vitro, bone marrow stromal cells (BMSCs) isolated from Y1(-/-) mice formed a greater number of mineralized nodules under osteogenic conditions and a greater number of adipocytes under adipogenic conditions than controls. In addition, both the number and size of fibroblast colony-forming units formed in vitro by purified osteoprogenitor cells were increased in the absence of the Y1 receptors, suggestive of enhanced proliferation and osteogenesis. Furthermore, the ability of two specific populations of mesenchymal progenitor cells isolated from bone tissue, an immature mesenchymal stem cell population and a more committed osteoprogenitor cell population, to differentiate into osteoblasts and adipocytes in vitro was enhanced in the absence of Y1 receptor signaling. Finally, Y1 receptor deletion also enhanced the mineral-producing ability of mature osteoblasts, as shown by increased in vitro mineralization by BMSCs isolated from osteoblast-specific Y1(-/-) mice. Together these data demonstrate that the NPY system, via the Y1 receptor, directly inhibits the differentiation of mesenchymal progenitor cells as well as the activity of mature osteoblasts, constituting a likely mechanism for the high-bone-mass phenotype evident in Y1(-/-) mice.