It is well established that testosterone negatively regulates fat mass in humans and mice; however, the mechanism by which testosterone exerts these effects is poorly understood. We and others have shown that deletion of the androgen receptor (AR) in male mice results in a phenotype that mimics the three key clinical aspects of hypogonadism in human males; increased fat mass and decreased bone and muscle mass. We now show that replacement of the Ar gene specifically in mesenchymal progenitor cells (PCs) residing in the bone marrow of Global-ARKO mice, in the absence of the AR in all other tissues (PC-AR Gene Replacements), completely attenuates their increased fat accumulation. Inguinal subcutaneous white adipose tissue and intra-abdominal retroperitoneal visceral adipose tissue depots in PC-AR Gene Replacement mice were 50–80% lower than wild-type (WT) and 75–90% lower than Global-ARKO controls at 12 weeks of age. The marked decrease in subcutaneous and visceral fat mass in PC-AR Gene Replacements was associated with an increase in the number of small adipocytes and a healthier metabolic profile compared to WT controls, characterised by normal serum leptin and elevated serum adiponectin levels. Euglycaemic/hyperinsulinaemic clamp studies reveal that the PC-AR Gene Replacement mice have improved whole-body insulin sensitivity with higher glucose infusion rates compared to WT mice and increased glucose uptake into subcutaneous and intra-abdominal fat. In conclusion, these data provide the first evidence for an action of androgens via the AR in mesenchymal bone marrow PCs to negatively regulate fat mass and improve metabolic function.