Glucocorticoids (GCs) exert potent, but poorly characterized, effects on the skeleton. The cellular activity of GCs is regulated at a prereceptor level by 11β-hydroxysteroid dehydrogenases (11βHSDs). The type 1 isoform, which predominates in bone, functions as a reductase in intact cells and regenerates active cortisol (corticosterone) from circulating inert 11-keto forms. The aim of the present study was to investigate the role of this intracrine activation of GCs on normal bone physiology in vivo using mice deficient in 11βHSD1 (HSD1^−/−). The HSD1^−/− mice exhibited no significant changes in cortical or trabecular bone mass compared with wild-type (Wt) mice. Aged HSD1^−/− mice showed age-related bone loss similar to that observed in Wt mice. Histomorphometric analysis showed similar bone formation and bone resorption parameters in HSD1^−/− and Wt mice. However, examination of bone marrow composition revealed a total absence of marrow adipocytes in HSD1^−/− mice. Cells from Wt and HSD1^−/− mice exhibited similar growth rates as well as similar levels of production of osteoblastic markers. The adipocyte-forming capacity of in vitro cultured bone marrow stromal cells and trabecular osteoblasts was similar in HSD1^−/− and Wt mice. In conclusion, our results suggest that 11βHSD1 amplification of intracellular GC actions in mice may be required for bone marrow adipocyte formation, but not for bone formation. The clinical relevance of this observation remains to be determined.