The class I KNOX transcription factors SHOOT MERISTEMLESS (STM) and KNAT1 are important regulators of meristem maintenance in shoot apices, with a dual role of promoting cell proliferation and inhibiting differentiation. We examined whether they control stem cell maintenance in the cambium of Arabidopsis hypocotyls, a woodforming lateral meristem, in a similar fashion as in the shoot apical meristem. Weak loss-of-function alleles of KNAT1 and STM led to reduced formation of xylem fibers -highly differentiated cambial derivatives -whereas cell proliferation in the cambium was only mildly affected. In a knat1;stm double mutant, xylem fiber differentiation was completely abolished, but residual cambial activity was maintained. Expression of early and late markers of xylary cell differentiation was globally reduced in the knat1;stm double mutant. KNAT1 and STM were found to act through transcriptional repression of the meristem boundary genes BLADE-ON-PETIOLE 1 (BOP1) and BOP2 on xylem fiber differentiation. Together, these data indicate that, in the cambium, KNAT1 and STM, contrary to their function in the shoot apical meristem, promote cell differentiation through repression of BOP genes.