In this study, we identified a CD105+CD90.1-CD133-CD55- (CD133-CD55-) population in the fetal skeletal element that can generate bone and bone marrow. Besides osteoblasts and chondrocytes, the CD133-CD55- common progenitors can give rise to marrow reticular stromal cells and perivascular mesenchymal progenitors suggesting they function as the fetal common skeletal progenitor. Suppression of CXCL12 and Kitl expression in CD133-CD55- common progenitors severely disrupted the BM niche formation but not bone generation. Thus, CD133-CD55- common progenitors are the main source of CXCL12 and Kitl producing cells in the developing marrow.