Hypothyroidism and thyrotoxicosis are each associated with an increased risk of fracture. Although thyroxine (T4) is the predominant circulating thyroid hormone, target cell responses are determined by local intracellular availability of the active hormone 3,5,3'-L-triiodothyronine (T3), which is generated from T4 by the type 2 deiodinase enzyme (D2). To investigate the role of locally produced T3 in bone, we characterized mice deficient in D2 (D2KO) in which the serum T3 level is normal. Bones from adult D2KO mice have reduced toughness and are brittle, displaying an increased susceptibility to fracture. This phenotype is characterized by a 50% reduction in bone formation and a generalized increase in skeletal mineralization resulting from a local deficiency of T3 in osteoblasts. These data reveal an essential role for D2 in osteoblasts in the optimization of bone strength and mineralization.