We have previously reported that the cortical bone thinning seen in mice lacking the Wnt signaling antagonistSfrp4is due in part to impaired periosteal apposition. The periosteum contains cells which function as a reservoir of stem cells and contribute to cortical bone expansion, homeostasis, and repair. However, the local or paracrine factors that govern stem cells within the periosteal niche remain elusive. Cathepsin K (Ctsk), together with additional stem cell surface markers, marks a subset of periosteal stem cells (PSCs) which possess self-renewal ability and inducible multipotency.Sfrp4is expressed in periosteal Ctsk-lineage cells, andSfrp4global deletion decreases the pool of PSCs, impairs their clonal multipotency for differentiation into osteoblasts and chondrocytes and formation of bone organoids. Bulk RNA sequencing analysis of Ctsk-lineage PSCs demonstrated thatSfrp4deletion down-regulates signaling pathways associated with skeletal development, positive regulation of bone mineralization, and wound healing. Supporting these findings,Sfrp4deletion hampers the periosteal response to bone injury and impairs Ctsk-lineage periosteal cell recruitment. Ctsk-lineage PSCs express the PTH receptor and PTH treatment increases the % of PSCs, a response not seen in the absence ofSfrp4. Importantly, in the absence ofSfrp4, PTH-dependent increase in cortical thickness and periosteal bone formation is markedly impaired. Thus, this study provides insights into the regulation of a specific population of periosteal cells by a secreted local factor, and shows a central role for Sfrp4 in the regulation of Ctsk-lineage periosteal stem cell differentiation and function.