Estrogen uses two mechanisms to exert its effect on the skeleton: it inhibits bone resorption by osteoclasts and, at higher doses, can stimulate bone formation. Although the antiresorptive action of estrogen arises from the inhibition of the MAPK JNK, the mechanism of its effect on the osteoblast remains unclear. Here, we report that the anabolic action of estrogen in mice occurs, at least in part, through oxytocin (OT) produced by osteoblasts in bone marrow. We show that the absence of OT receptors (OTRs) in OTR-/- osteoblasts or attenuation of OTR expression in silenced cells inhibits estrogen-induced osteoblast differentiation, transcription factor up-regulation, and/or OT production in vitro. In vivo, OTR-/- mice, known to have a bone formation defect, fail to display increases in trabecular bone volume, cortical thickness, and bone formation in response to estrogen. Furthermore, osteoblast-specific Col2.3-Cre+/OTRfl/fl mice, but not TRAP-Cre+/OTRfl/fl mice, mimic the OTR-/- phenotype and also fail to respond to estrogen. These data attribute the phenotype of OTR deficiency to an osteoblastic rather than an osteoclastic defect. Physiologically, feed-forward OT release in bone marrow by a rising estrogen concentration may facilitate rapid skeletal recovery during the latter phases of lactation.