Osteoarthritis is a highly prevalent and debilitating joint disorder. There is no effective medical therapy for the condition because of limited understanding of its pathogenesis. We show that transforming growth factor β1 (TGF-β1) is activated in subchondral bone in response to altered mechanical loading in an anterior cruciate ligament transection (ACLT) mouse model of osteoarthritis. TGF-β1 concentrations are also high in subchondral bone from humans with osteoarthritis. High concentrations of TGF-β1 induced formation of nestin-positive mesenchymal stem cell (MSC) clusters, leading to formation of marrow osteoid islets accompanied by high levels of angiogenesis. We found that transgenic expression of active TGF-β1 in osteoblastic cells induced osteoarthritis, whereas inhibition of TGF-β activity in subchondral bone attenuated the degeneration of articular cartilage. In particular, knockout of the TGF-β type II receptor (TβRII) in nestin-positive MSCs led to less development of osteoarthritis relative to wild-type mice after ACLT. Thus, high concentrations of active TGF-β1 in subchondral bone seem to initiate the pathological changes of osteoarthritis, and inhibition of this process could be a potential therapeutic approach to treating this disease.