The dysfunction of bone marrow stromal cells (BMSCs) may be a core factor in Type 2 diabetes mellitus (T2DM) associated osteoporosis. However, the underlying mechanism is not well understood. Here, we delineated the critical role of insulin impeding osteogenesis of BMSCs in T2DM. Compared with BMSCs from healthy people (H-BMSCs), BMSCs from T2DM patient (DM-BMSCs) showed decreased osteogenic differentiation and autophagy level, and increased senescent phenotype. H-BMSCs incubated in hyperglycemic and hyperinsulinemic conditions similarly showed these phenotypes of DM-BMSCs. Notably, enhanced TGF-β1 expression was detected not only in DM-BMSCs and high-glucose and insulin-treated H-BMSCs, but also in bone callus of streptozocin-induced diabetic rats. Moreover, inhibiting TGF-β1 signaling not only enhanced osteogenic differentiation and autophagy level of DM-BMSCs, but also delayed senescence of DM-BMSCs, as well as promoted mandible defect healing of diabetic rats. Finally, we further verified that it was TGF-β receptor II (TβRII), not TβRI, markedly increased in both DM-BMSCs and insulin-treated H-BMSCs. Our data revealed that insulin impeded osteogenesis of BMSCs by inhibiting autophagy and promoting premature senescence, which it should be responsible for T2DM-induced bone loss, at least in part. These findings suggest that inhibiting TGF-β1 pathway may be a potential therapeutic target for T2DM associated bone disorders.