We generated a new Bmp2 conditional-knockout allele without a neo cassette that removes the Bmp2 gene from osteoblasts (Bmp2-cKO(ob)) using the 3.6Col1a1-Cre transgenic model. Bones of Bmp2-cKO(ob) mice are thinner, with increased brittleness. Osteoblast activity is reduced as reflected in a reduced bone formation rate and failure to differentiate to a mature mineralizing stage. Bmp2 in osteoblasts also indirectly controls angiogenesis in the periosteum and bone marrow. VegfA production is reduced in Bmp2-cKO(ob) osteoblasts. Deletion of Bmp2 in osteoblasts also leads to defective mesenchymal stem cells (MSCs), which correlates with the reduced microvascular bed in the periosteum and trabecular bones. Expression of several MSC marker genes (α-SMA, CD146 and Angiopoietin-1) in vivo, in vitro CFU assays and deletion of Bmp2 in vitro in α-SMA(+) MSCs support our conclusions. Critical roles of Bmp2 in osteoblasts and MSCs are a vital link between bone formation, vascularization and mesenchymal stem cells.