A major cause of morbidity in patients with multiple myeloma is the development and progression of bone disease. Myeloma bone disease is characterized by rampant osteolysis in the presence of absent or diminished bone formation. Heparanase, an enzyme that acts both at the cell-surface and within the extracellular matrix to degrade polymeric heparan sulfate chains, is upregulated in a variety of human cancers including multiple myeloma. We and others have shown that heparanase enhances osteoclastogenesis and bone loss. However, increased osteolysis is only one element of the spectrum of myeloma bone disease. In the present study, we hypothesized that heparanase would also affect mesenchymal cells in the bone microenvironment and investigated the effect of heparanase on the differentiation of osteoblast/stromal lineage cells. Using a combination of molecular, biochemical, cellular and in vivo approaches, we demonstrated that heparanase significantly inhibited osteoblast differentiation and mineralization, and reduced bone formation in vivo. In addition, heparanase shifts the differentiation potential of osteoblast progenitors from osteoblastogenesis to adipogenesis. Mechanistically, this shift in cell fate is due, at least in part, to heparanase-enhanced production and secretion of the Wnt signaling pathway inhibitor DKK1 by both osteoblast progenitors and myeloma cells. Collectively, these data provide important new insights into the role of heparanase in all aspects of myeloma bone disease and strongly support the use of heparanase inhibitors in the treatment of multiple myeloma. © 2013.