Wood formation, which occurs mainly through secondary xylem development, is important not only for supplying raw material for the 'ligno-chemical' industry but also for driving the storage of carbon. However, the complex mechanisms underlying the promotion of xylem formation remain to be elucidated. Here, we found that overexpression of Auxin-Regulated Gene involved in Organ Size (ARGOS) in hybrid poplar 84 K (Populus alba × Populus tremula var. glandulosa) enlarged organ size. In particular, PagARGOS promoted secondary growth of stems with increased xylem formation. To gain further insight into how PagARGOS regulates xylem development, we further carried out yeast two-hybrid screening and identified that the auxin transporter WALLS ARE THIN1 (WAT1) interacts with PagARGOS. Overexpression of PagARGOS up-regulated WAT1, activating a downstream auxin response promoting cambial cell division and xylem differentiation for wood formation. Moreover, overexpressing PagARGOS caused not only higher wood yield but also lower lignin content compared with wild-type controls. PagARGOS is therefore a potential candidate gene for engineering fast-growing and low-lignin trees with improved biomass production.