Specific oxysterols have been shown to be pro-osteogenic and anti-adipogenic. However, the molecular mechanism(s) by which oxysterols inhibit adipogenic differentiation is unknown. We show that the anti-adipogenic effects of osteogenic oxysterol, 20(S)-hydroxycholesterol, are mediated through a hedgehog-dependent mechanism(s) and are associated with inhibition of PPARgamma expression. Multipotent bone marrow stromal cells (MSCs) are common progenitors of osteoblasts and adipocytes. A reciprocal relationship between osteogenic and adipogenic differentiation may explain the increased adipocyte and decreased osteoblast formation in aging and osteoporosis. We have previously reported that specific oxysterols stimulate osteogenic differentiation of MSCs while inhibiting their adipogenic differentiation. The M2-10B4 (M2) murine pluripotent bone MSC line was used to assess the inhibitory effects of 20(S)-hydroxycholesterol (20S) and sonic hedgehog (Shh) on peroxisome proliferator-activated receptor gamma (PPARgamma) and adipogenic differentiation. All results were analyzed for statistical significance using ANOVA. Treatment of M2 cells with the osteogenic oxysterol 20S completely inhibited adipocyte formation induced by troglitazone after 10 days. PPARgamma mRNA expression assessed by RT-qPCR was significantly induced by Tro after 48 (5-fold) and 96 h (130-fold), and this induction was completely inhibited by 20S. In contrast, 20S did not inhibit PPARgamma transcriptional activity in M2 cells overexpressing PPARgamma and retinoid X receptor (RXR). To elucidate the molecular mechanism(s) by which 20S inhibits PPARgamma expression and adipogenic differentiation, we focused on the hedgehog signaling pathway, which we previously showed to be the mediator of osteogenic responses to oxysterols. The hedgehog signaling inhibitor, cyclopamine, reversed the inhibitory effects of 20S and Shh on troglitazone-induced adipocyte formation in 10-day cultures of M2 cells by 70% and 100%, respectively, and the inhibitory effect of 20S and Shh on troglitazone-induced PPARgamma expression was fully reversed at 48 h by cyclopamine. Furthermore, 20S and Shh greatly inhibited PPARgamma2 promoter activity induced by CCAAT/enhancer-binding protein alpha overexpression. These studies show that, similar to the induction of osteogenesis, the inhibition of adipogenesis in murine MSCs by the osteogenic oxysterol, 20S, is mediated through a hedgehog-dependent mechanism(s).