Skeletal stem/progenitor cells (SSPCs) can differentiate into osteogenic or adipogenic lineage. The mechanism governing lineage allocation of SSPCs is still not completely understood. Hedgehog (Hh) signaling plays an essential role in specifying osteogenic fate of mesenchymal progenitors during embryogenesis. However, it is still unclear whether Hh signaling is required for lineage allocation of SSPCs in postnatal skeleton, and whether its dysregulation is related to age-related osteoporosis. Here, we demonstrated that Hh signaling was activated in metaphyseal SSPCs during osteogenic differentiation in the adult skeleton, and its activity decreased with aging. Inactivation of Hh signaling by genetic ablation of Smo, a key molecule in Hh signaling, in Osx-Cre-targeted SSPCs and hypertrophic chondrocytes led to decreased bone formation and increased bone marrow adiposity, two key pathological features of age-related osteoporosis. Moreover, we found that the bone-fat imbalance phenotype caused by Smo deletion mainly resulted from aberrant allocation of SSPCs toward adipogenic lineage at the expense of osteogenic differentiation, but not due to accelerated transdifferentiation of chondrocytes into adipocytes. Mechanistically, we found that Hh signaling regulated osteoblast versus adipocyte fate of SSPCs partly through upregulating Wnt signaling. Thus, our results indicate that Hh signaling regulates bone homeostasis and age-related osteoporosis by acting as a critical switch of cell fate decisions of Osx-Cre-targeted SSPCs in mice and suggest that Hh signaling may serve as a potential therapeutic target for the treatment of osteoporosis and other metabolic bone diseases. © 2021 American Society for Bone and Mineral Research (ASBMR).