Development of bone and adipose tissue are linked processes arising from a common progenitor cell, but having an inverse relationship in disease conditions such as osteoporosis. Cellular differentiation of both tissues relies on growth factor cues, and we focus this study on Sprouty1 (Spry1), an inhibitor of growth factor signaling. We tested whether Spry1 can modify the development of fat cells through its activity in regulating growth factors known to be important for adipogenesis. We utilized conditional expression and genetic-null mouse models of Spry1 in adipocytes using the fatty acid binding promoter (aP2). Conditional deletion of Spry1 results in 10% increased body fat and decreased bone mass. This phenotype was rescued on Spry1 expression, which results in decreased body fat and increased bone mass. Ex vivo bone marrow experiments indicate Spry1 in bone marrow and adipose progenitor cells favors differentiation of osteoblasts at the expense of adipocytes by suppressing CEBP-beta and PPARgamma while up regulating TAZ. Age and gender-matched littermates expressing only Cre recombinase were used as controls. Spry1 is a critical regulator of adipocyte differentiation and mesenchymal stem cell (MSC) lineage allocation, potentially acting through regulation of CEBP-beta and TAZ.