Diabetes mellitus, the single most important cause of vascular disease in the industrialized world, is also associated with bone loss and impaired fracture healing. Mesenchymal stem cells (MSCs) have the potential to differentiate into osteoblasts, chondrocytes and adipocytes and other mesenchymal cells and play a central role in bone formation and repair. Because of this, we have investigated the possibility that diabetes has direct effects on MSCs in vivo and that this might represent a cellular basis for diabetes-induced osteoporosis. We isolated MSCs from rats with streptozotocin-induced diabetes and analysed them ex vivo for their ability to proliferate and differentiate in the fibroblastic colony-forming unit assay. Effects of diabetes on bone metabolism in vivo were determined by analysing tibiae from control and diabetic animals by quantitative computerized tomography. The total number of colonies and osteoblastic colonies staining positive for alkaline phosphatase were quantified and both colony size and number were found to be significantly reduced in diabetic rats. The changes appear to be mediated by the induction of apoptosis and senescence by advanced glycation end products (AGEs), together with an increase in the receptor for AGEs (RAGE). These changes were paralleled by extensive loss of trabecular bone in the tibiae of the diabetic animals. These data suggest that MSCs become exhausted during diabetes and lose their differentiation potential, leading to a net loss of trabecular bone. Therefore, direct effects on MSCs may be responsible for some of the orthopaedic effects associated with diabetes.